Mises Daily

The Effect of Wage-Rate Interventions

[Understanding the Dollar Crisis (1973)]

This lecture is primarily on the subject of labor, wages, and employment. A good deal of what was said about prices in the last lecture applies also to the subject of wage rates. Unfortunately, there is more emotion in this area, because it is a bit more personal. Here, too, of course, we also find evidence of the great sin of economic ignorance. In seeking solutions, economic science is largely neglected. As a result, many governments attempt to solve these problems by means that will not accomplish the desired ends.

Please do not think, as many do, that economics — which is a science — takes sides on this issue. This is not a question that can be settled by bias, that is, by taking one side or the other. It is always a question of what helps everybody, and what policies will help to produce the ends that people want most.

All of us in this world want peace and prosperity. No one wants poverty even for other people.

Free Market: An Application of the Golden Rule

A major question that we face is the problem of reducing or eliminating poverty. I suggest that free market policies have eliminated more poverty than any other policy or system that has ever been known to man. In a truly free society, everyone enjoys the fruits of his own labor, and no one is entitled to special privileges. Everyone is free to choose his own actions. Everyone is free to take that job open to him that he believes will provide him with the greatest compensations. In a free society we constantly tend to act according to the Golden Rule, that is, by serving others as we serve ourselves.

This is, of course, true in the area of employment as it is true in all other market areas. However, there is a good deal of misunderstanding about this. Many think that we can raise wages by merely passing laws. This is an impossible thing to do for everyone. In fact, every law that raises wages for some lowers them for others. It seems to be very difficult for people to realize that all wages and employment cannot be increased by the mere passing of laws.

As mentioned last night, most people seem to think that producers and sellers set prices. Likewise, they seem to think that employers set wage rates. They think employers get rich by setting low wages for their employees and high prices for their products. This is a very popular fallacy, which we shall be discussing as we move on.

I understand that Argentina has a minimum wage law similar to ours in the United States. They tell the story in my country about a man who is running a small business. The inspector from the Minimum Wage Office in Washington comes out and asks him about his three employees. The inspector wants to know how much he pays them, the hours they work, and what they do. He examines closely the books of the little firm, checking to find out if the wages paid are above the minimum specified by law. Then he asks: “Is there anyone around here who gets less than the minimum wage?” The businessman answers: “Yes! There is.” The inspector, all alert, says: “Let me speak to him.” The owner of the business replies: “You are talking to him now. I work for my keep and very little more.”

This touches on the problem that we are discussing, for small business owners who cannot make as much as their employees will soon stop hiring workers and start competing as employees.

There is a popular thought today that employers can be compelled 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. As we have said before, in analyzing every economic problem it is necessary to examine all of the effects, and not only the short-run effects, but also the long-run effects, and not only the effects on those whom you seek to benefit, but also the effects on those who have to pay the costs. You should always weigh all of these inevitable effects before reaching your decision.

Freedom Permits Responsible Choices

Man differs from other animals in that he has foresight. He can think of consequences that extend beyond the immediate day. If a man feels cold one night in his home, he does not burn up the furniture just to get warm. A wise man looks ahead. He will have firewood or a furnace on hand. Unfortunately not enough people look far enough ahead. In this area of labor, wages, and employment, very few people look ahead and think the problems through to their logical conclusions. This is where economics can help us. Economics is a science that starts with the assumed conditions and then reasons, step by step, to the desired conclusions. If your assumptions and your reasoning are correct, you will produce the results you seek. Unfortunately, in this area of labor, wages, and employment, the greatest area of unemployment is that little narrow space between men’s ears. There is little evidence of the intelligent employment of men’s minds in the popular solutions of these problems.

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 everybody 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 regarding 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 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; it also provides the means by 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. It is our private duty to help those in distress over their troubles.

Unpopular Governments Fall

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.

Government, by definition, is a monopoly of force. It represents the combined strength of the community in suppressing those things which the community opposes. In the long run, a government must always be popular. There is no such thing, in the long run, as an unpopular government.1

In this connection, it should be noted that price and wage controls, once anathema to freedom-loving Americans, were accepted on August 15, 1971, with hardly a whimper of dissent. They continue to be acceptable because the majority of Americans now acquiesce in this part of the statist ideology that has been promoted by those interventionist-minded persons who control our mass media and educational system. This passive acceptance of the controlled economy pulls the rug out from under those Americans who so indignantly criticized the Germans for their peaceful acceptance of Hitler.

In the long run, we get the governments we deserve. No matter what those in political power may think, they cannot long do things that are not popular. We should remember this when we criticize some of those who are in office, because their powers to act are always limited by what the public is ready to accept.

Unfortunately, free market economics is not generally taught today. Consequently, very few people learn the ideas of the free market economy and understand what they mean for mankind. Many people think of my country as great and strong, but they do not realize that its greatness and strength came from years of practicing free market principles, many of which it has deserted in recent years.

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 Marx. My second lecture touched upon it briefly when I discussed the labor theory of value and Marx’s idea that employers overworked employees, paying them less than the values they produced, while keeping the difference for themselves. According to this theory, the 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 that bound them to their employers and set up a socialist utopia. According to this idea, in a market society the poor worker is helpless. 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. Free market economics teaches that 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 they contribute. 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. We tried to show this in the last lecture in relation to prices. 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. 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 market tendency we tried to illustrate in the last lecture. The more workers you hire, the higher the 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 sell them only 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 it were allowed to work. Unfortunately, as mentioned last night, 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 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 the point where he can sell all his products at a price that covers his costs, he will eventually be forced out of business. No businessman can long pay costs that 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 market wages. In his great book, 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 hold wage rates down by agreement 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 it is a free market society wherein anybody can become an employer, new employers will soon appear to take advantage of the situation by offering workers higher wages.

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 50 pesos an hour and sell his product for 100 pesos 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 60 pesos and sell their product for 100 pesos if we could. Others would soon offer to pay them 70, 80, or 90 pesos. In fact, large corporations would be very happy to make a profit of just one peso 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.

A frequent refutation is, “Yes, but most people do not have the capital to start a business.” Let’s remember that 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 constantly going on in the market. If you do not believe this, get into the stock market and learn what is happening there as the result of competition among the many investors eager for higher returns on their savings.

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 are consumed, then these unconsumed goods and services are available for making tools, factories, and other things needed to help increase production. In my great country, living standards have gone up in the past because generation after generation of North Americans provided their children with more than they themselves had 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 give their children 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 the higher education was the result of increased savings. The earlier generations just could not afford to provide their children with as much as later generations could.

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, capital 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 large businesses seeking more capital in order to offer more or better goods or services.

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.

When I graduated from college in 1929, my first employer gave me a schedule for savings. It provided that a young man save 10 percent of his first income and 50 percent of all the later increases in his income. Of course, the author of the plan did not foresee years of inflation, and income tax rates that now exceed 50 percent. He indicated that anyone who followed that savings plan all his working life, would have, by retirement age, such a good investment income that he would not feel the loss of his wages. Savings are, of course, the only real source of old age security.

Effect of New Savings

When new capital is invested, the very first thing it does, whether it is invested in a new company or in the expansion of an old company, is to bid up wages and the prices of raw materials. It bids 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. Many mines are not worked because the available supply of labor is 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 cost of labor. Labor is one of the scarcest things that each of us has, and likewise, that each business or nation has. Many projects are not undertaken because of this shortage of labor.

With new savings, there are employers, people economists call “entrepreneurs,” who are constantly trying to employ more workers. They have to bid for limited quantities of labor in the competition of the marketplace. The factor which helps labor most is the increased savings that permit employers to bid workers away from their previous, lower-paying jobs. After these savings are turned into new or larger factories, workers are then able to produce goods and services previously not available.

In the last lecture we tried to show how the managers of these new expansions 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 quantity of money, as more goods reach the market the result must be lower prices. With lower prices for consumers’ goods, everyone can buy more with his or her limited quantity of money. This method, that is, increasing the amount of savings available per worker, is the only one by which a society can raise the real wages of all its workers.

In some industries, such as the steel industry in my country, the 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 one or two hundred years, competes in the labor market with steel workers, each of whom uses $20,000 worth 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, to say nothing of any interest or profit on their speculative investment.

Profits may come, but they can only come later, if some buyers voluntarily, 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 capita, more savings per worker. A man with a modern 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

What are the policies that we find in the market today? The essence of labor union policies 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 forced lower or become nonexistent for those made unemployable.

In my country there may not be as high a percentage of workers in labor unions as there are in Argentina. However, 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 the next lower-paying jobs drives out some previously employed workers. 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 economic ignorance. It is due in part to the fallacious idea we discussed in our second lecture, the idea that only an equal exchange is a fair exchange, and that if the employer gains, he must have done so at the expense of the worker. This is responsible for 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 reproduce themselves in, let us say, ten hours per day. Employers worked them 11 or 12 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, throughout history, men like to take some of their increased standard of living in the form of longer hours of leisure. When this is done by 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. The idea that raising wages can do 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.

Fallacy of Excessive Employer Power

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 many people, people who have been or who are in high places, quite honestly, quite 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 modern industrial society employers have great power, while the poor workers are helpless.

Here are a few quotations from some prominent men of my country who subscribe to this erroneous doctrine. One of these is Donald Richberg. Some of you may have heard of him. He was one of those who felt very sorry for the poor workers back in the days of President Wilson and the New Freedom. He participated in the political propaganda that brought forth one of the first Federal labor laws in the United States, the Railway Labor Act of 1926. He was later one of the men who headed the National Recovery Administration of our New Deal days. In his later years he learned a few things from experience and changed some of his political interventionist opinions, but he still held the popular fallacy that, in a free market, employers possess what he called “excessive bargaining power.” He therefore felt that labor’s “resort to political aid” is “a justifiable use of government power in order to establish a fair balance between the conflicting economic powers of property owners and wage earners … the logical way to counteract the overwhelming, and often oppressive, power of the managers of large properties.”2

President Truman, in his last Economic Report to the Congress of the United States of North America in January 1953, said (page 22): “There is the problem of maintaining fair and peaceful bargaining among the powerfully organized private groups. The Government can help in this by protecting and encouraging the maintenance of balanced bargaining power.”

Fallacy Almost Universal

Now we need not pick on any one particular political party of my country. Let me read from a pamphlet called The Worker’s Story, by Martin P. Durkin, a secretary of labor under President Eisenhower. This represents the thinking of the Republican Party, a party that many in our country tended to think of, at that time at least, as conservative, or, in European and Latin American terminology, as 19th-century liberal. This pamphlet states the thinking that is common in many places in the world today. It says,

Suppose there were no labor unions and no labor laws and you went out to get a job. Unless you had something very special to offer you would be in competition with a lot of other workers trying for the same job. As a result, you would have to accept what the employer offered you, or look for something else to do. You would quickly find that the man who has a job to offer almost always has the advantage over the man looking for work.

Then, supposing that, having got the job and there still being no union or law to support you, you found your wages too small to live on or the working conditions unsatisfactory. You would be only one individual against the employer’s strength. You could not successfully insist on his giving you what you ask, if he did not want to do so. As an ordinary individual worker you would have little bargaining strength.

But, suppose that you and several other workers got together and elected some of the group to speak on your behalf with the employer, pointing out that unless he could see his way clear to make such-and-such an improvement in wages or conditions of work, the group would stop work. Either he would have to look for workers elsewhere (and if those other workers also belonged to your group he would not be able to get them), or he would have to come to some kind of agreement regarding your demands, at least to the extent that he still finds it profitable to stay in business.

This second kind of arrangement by which workers, by joining together, get some kind of agreement with their employers is called “collective bargaining.” … Collective bargaining and labor unions are two sides of the same face.…

The job of the government under the Constitution is to maintain a balance among its citizens, and help them resolve their differences. Consequently, during the past forty years [this was written in 1953], and particularly during the past twenty years, legislation has been enacted to bring about a more reasonable balance between employers and organized labor and to provide certain services in helping to settle disputes.…

One of the first Federal laws protecting unions was the Railway Labor Act of 1926.… The National Labor Relations Act … gave Government protection to the formation of unions.… The act did this by prohibiting certain employer practices, and by insuring employees reinstatement in their jobs with back pay if their employers discharged them for union activities.… It … required employers to bargain collectively with the union so certified.3

And it is not only in official circles that we find this fallacy. Here is a quote from one of the last great old-time liberals of America, who passed away in 1964 at the age of 93. He was one of the most respected men of our legal profession, Roscoe Pound, the last of the old liberal Deans of the Harvard Law School. Since his retirement as Dean in 1936, a saying has become popular about people who go to Harvard: it is that you enter Harvard and then turn left. But this gentleman was one of the old school. In his little pamphlet, Legal Immunities of Labor Unions, written in 1957 when he was 86, he reiterated this popular error when, in this otherwise fine work, he said,

In an era of huge incorporated industrial enterprises there had come to be gross inequality of bargaining power between the incorporated employer and the individual workingman.… Traditional sanctity of property restricted effective employment of collective action in case of strikes.… Traditional ultratechnical judicial procedure resulted in a legal system which put the worker in a condition amounting almost to subjection. Reaction was inevitable.4

This general lack of economic understanding extends throughout the Western world. In the lectures that follow I shall touch somewhat on this problem in England, and how it contributes to the financial problem there.

Union Policies Need to Be Analyzed

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, the workers, or the poor in general is one’s 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 the 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 that reduce production. Unions make high wages higher for some, but they make costs higher for others, and thus reduce the production of goods and services that consumers, including workers, can buy in the marketplace.

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. We have had cases in New York where you cannot get into a union unless your father was in it before you. The fact that, under the law, only union members can work in certain trades, has hurt Negroes trying to enter trades white unions have monopolized. Since his father was not in the union, how can a Negro ever get into it? 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 — unions — can raise wages only if they can raise the value or the quantity of the product they produce. Now, as we have mentioned in previous lectures, if the quantity produced is smaller, other things remaining the same, the value per unit is greater. The available quantity will satisfy fewer consumers and thus provide less human satisfaction. So, if they do not increase production, the only way unions 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 who are 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, since 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 wage rates in an industry were lower than those forced by unions, that industry would expand. When unions raise the wage rates of an industry, that industry either has to contract or, if it stays the same size, is prevented from expanding as it would if it could pay free market wage rates.

Expanding means paying higher wage rates to attract the additional 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 by merely 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 wage rates.

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.

We have in table 13 an example that is based on certain assumptions — all economic problems are based on certain assumptions — in order to give you some idea of the problems faced by workers and by those who try to make a living by employing people. First, we assume a steamship, which cost $2 million to build and which is expected to last 20 years. It has a yearly depreciation and interest charge of $150,000 and 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, as all human beings do, particularly when making a substantial investment of this kind. If their forecast is correct, they expect their weekly costs to be:

 Depreciation and interest$3,000
 Labor wages8,000
 Other operating costs2,100

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

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 wage rates above those prevailing in the market at the time, the investors will be at the mercy of the unions.

Now, we shall assume here, in the next column, that the union is able to threaten a strike or otherwise use its power to raise wages 10 percent. This increases the cost of labor to $8,800 and reduces the profit over interest to $200. Under such a situation, the owners will continue operating. They will 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 percent increase, are still not satisfied. They try it again. Let us assume that this time they increase wages to 25 percent above free market wage rates. 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 even 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, and $2,000 is better than nothing. As we mentioned in the last lecture, everyone prefers a little something to nothing. At this rate, when the ship is worn out, they 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.


ASSUME: A steamship, cost, $2,000,000; expected life, 20 years. Annual depreciation and interest charge, $150,000. Market revenue, $14,100 per week (50 weeks per year).

Weekly CostsAt Free
Market Wages
If Union
Wages Up

Depreciation and interest

$3,000$3,000$2,000$ 00
Wages of labor8,0008,80010,00012,000
Other operating costs2,1002,1002,1002,100
Profit (over and above interest)1,0002000000

But assume the union workers do not see this. Suppose they go on and ask for a further increase. This time we assume they are able to get a total increase of 50 percent. 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 is just covering 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 operate the ship for nothing. This they do not care to do. So the operation comes to an end and the workers lose their jobs. They have killed a good thing.

Savers Can Be Scared Away

All this is not very far from reality. We had a somewhat similar situation in the United States. It was not even on a lake. For many years we had the Old Fall River Line, as they called it in my youth. 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 of us enjoyed. But the unions kept raising the wage rates 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 wage rates to the point where 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 whole 100 percent investment. 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. Everything does not 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 push wages up to the point where it pays to replace some parts and continue operations. This keeps businesses already established in operation, but it greatly discourages the starting of new businesses.

These union policies 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 we have been discussing 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 it is 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 is 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 that will encourage savings. We have had this problem in the Western world for a good many years now, for most of this century. We shall be discussing it more in the lecture on the depression. However, as union wage rates 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 wage rates raises 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 they too are organized and held up by 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 my country this is now $1.40 an hour. We still do not have a dictatorship. Until we do, employers will only employ people if they can hope to get the $1.40 back from consumers. If the consumer says a man’s contribution is only worth $1.30, the employer is not going to pay him $1.40. 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 even earn what he could, which is what the consumer will pay for his contribution. So we have invented unemployment insurance 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.

Good Names for Laws Not Enough

We have had many attempts at intervention in my country, and I presume here also, as in other countries. People with the best intentions and the least economic understanding constantly try to help the people on the bottom of the economic ladder by governmental intervention. In our country we 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 very nice-sounding names.

The question, as I mentioned in the very first lecture, is not good intentions. The question is, Is this a sound means for attaining 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 had surplus after surplus. We had to give billions of dollars to the farmers, and still do. After 35 years, the program is still floundering around and costing taxpayers billions per year. But there was one of these programs that was correctly named. That was the Unemployment Insurance Act, because it surely did insure, that is, guarantee, unemployment.

Those 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. No one can 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. As I said earlier, governments 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.

The market system, whose operations we tried to describe in the last lecture, 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 do not make as many candles, for instance. They switch to producing electric bulbs and lamps. And so it is with workers in different industries. But 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 Are Not Enemies

Actually, in real life, workers and investors in the same company are not competitors. Production and marketing are not class warfare. Investors, 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 demand the repeal of all laws that permit unions to exclude qualified workers from competing for jobs in union-organized industries. We must stop subsidizing unemployment and permit wage rates to be set by free market competition in the service of consumers.

The Keynesian Solution

This is not the policy in most countries of the world. What is happening instead is that 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 that 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 Keynes’ book, The General Theory of Employment, Interest and Money. The key sentence is: “A movement by employers to revise money-wage bargains downward will be more strongly resisted than a gradual and automatic lowering of real wages as a result of rising prices.”5

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 more 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. This will be the subject of the next lectures. We will then discuss money and the government handling of this monetary problem. 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. It is very difficult to get out of such a situation. The real answer, of course, is economic education.

Present Policies Doomed

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. They may call him an economist, but he 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 on 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.


Unions Could Serve Society

Q. Are you against unions per se?

A. I can answer that in Spanish: NO! I am not against unions per se. Unions could be very beneficial to society. I am against privileges for anybody, including unions. If unions were organized on the basis of accepting only the best workers as members, and if union members performed a full day’s work of high caliber, I, as a prospective employer, would be happy to hire union men and only union men rather than untried non-union workers of questionable ability. When unions serve society as they serve their members, they operate under the Golden Rule. Then they can be a force for good. The problem arises when you give them special privileges, such as the power to shut out other potentially able workers in their drive to raise wage rates above those that would prevail in a free market.

Minimum Prices and Wages Restrict Efficiency

Q. What is the difference between minimum prices and minimum wages?

A. They are both political interferences with the efficiency of the free market. We have discussed tonight the effects of minimum wage laws. These laws try to raise workers’ wages above free market wages. This cannot be done in a market economy without forcing some workers into lower-paid jobs or unemployment. If you have a complete dictatorship, yes. But short of a complete dictatorship, an employer will not long pay a man more than what he hopes to get back from consumers. Of course, men make mistakes, as we said in the very first lecture. An employer may do it for a week, a month, or a year, but sooner or later he has got to stop. He cannot do this as a permanent policy. Now, by minimum prices, you mean laws or policies which try to keep prices above free market prices. Some companies try to maintain prices higher than free market retail prices for certain products. This means, of course, that fewer units will be sold and fewer workers employed by that particular company. When such practices are protected by law, they hurt consumers and workers generally. They give some people a special privilege. When such practices are not protected by law, they invite competition.

Government Indoctrination of the Young

Q. Is education a function of government?

A. If we had about two hours, I should like to answer that. My short answer has to be “no,” except for those in the Army and Navy. The training of officers for the Army, Navy, and Air Force is a function of the government. Other than that, education is not a governmental function. Anyone who understands the benefits of competition must hold that the system that is best for producing what people want most through the market forces is also the best system for producing the best education. I would not give any corporation, church, or government a monopoly of education. Both goods and education are improved by competition. A short answer will sound like heresy. But let us remember that a person who works for a large corporation or anybody else could not teach publicly that his boss might be wrong and keep his job long. A teacher on the public payroll is not going to advocate a reduction in government expenditures, if his own salary depends on higher government expenditures. As a government employee, a teacher is in an awkward position. The maintenance of freedom depends on eternal vigilance against any encroachments by those in political office. It is very difficult for government-paid teachers to be critical of their employer for any extended period.

The public school system was started by people of good will who were sorry for the children of poor people. They thought these children could not get an education without subsidies from taxpayers. But public education is one of the most expensive ways to do it. In my country, we have palaces for the children of poor people. Many children are in school buildings of far better quality than their homes, and the poor people still pay taxes to build these palaces. We also have graft in putting up school buildings. We do not have competition for the best teachers. In the city of New York we had three teachers’ strikes during the last school year. The students got no education whatsoever during those periods, except perhaps the lesson that the way to get things in this world is to join a union and strike against the general welfare. There is much that could be said on this subject, but for a short answer let us say that competition would greatly improve the quality of our education and the ability to spot encroachments on our freedom. There is the problem of the teachers, too. If they had more employer groups competing for their services, they would do a better job and the good ones would be better rewarded.

Sound Economics and Patriotism

Q. Is the man who sends his money outside of his country doing a good job for his country?

A. In general, the answer is probably yes. If he is doing it because his country is not following sound economic policies, he is pointing up one of the inevitable results of such poor policies. Those poor policies are not going to be changed until there is a better public understanding of the bad results that inevitably flow from such policies. If those who set economic policies realize that unsound policies make it impossible to replace the worn-out factories, as in the case of the steamship, and to provide the high-paying jobs that workers want, then the politicians may come to the realization that they must do something to keep investments in the country. Gresham’s law still works. So unless people are encouraged to invest at home by sound economic policies, they will send their savings abroad.

Compulsion Should Be Avoided

Q. What is your opinion about compulsory collective bargaining?

A. I am against all privileges, and the use of compulsion in a free society is either a privilege or a crime.

Unions Scare Savers

Q. What are the consequences of compulsory collective bargaining?

A. They are the results that I have tried to portray in this particular lecture. They raise some wages above those of the free market. Some workers may get these wages, but the policies scare capital and savers. In the long run such policies hurt the workers. Once capital is confiscated, it will not be voluntarily reproduced. An increased standard of living comes from increased savings per capita. There is a feeling in many places that capital increases just as automatically as the sun rises in the East. Capital does not increase automatically. Some people have to refrain from spending all their wealth, to save some of it. Then they must be induced to invest these additional savings. In a market society this is best done by providing savers with the hope of improving their situation by the receipt of interest and possibly profits if earned.

Inflation Fools Some, But Not All

Q. Does inflation fool workers?

A. Inflation does not fool all the workers. The person who asked this question apparently thinks that it still does fool them. Certainly it does fool some. Of course, I cannot speak for the workers in your great country. But there are fewer and fewer being fooled in my country, and those that are fooled are certainly not the ones in the big unions — the steel workers, auto workers, and so forth. Their unions have people who understand inflation and they demand ever-higher wages to compensate for the higher prices. Our labor unions have recently awakened to a new point. If the cost of living goes up 7 percent, they are no longer satisfied with an increase of 7 percent, because they realize that out of that 7 percent the state and Federal governments are going to take in taxes some 25 to 35 percent. So in order to get 7 percent more they have to get a raise of 10 or 11 percent. This adds 10 or 11 percent to production costs, and this starts the wage-price spiral going still further. In my country the leading labor unions are in on this. I certainly wouldn’t say that all government workers are. Some workers are still buying government bonds that pay only 4Vi percent, when the cost of living is going up 7 percent. That does not reflect a high economic awareness of what is going on.

Reason for So Much Violence

Q. Does inflation provoke union violence?

A. Probably every case is a different one. I certainly cannot speak for your country. In my country, violence results from the fact that labor unions have the privilege of getting away with violence. They are not punished for their violence. This is the reason it continues. In fact, today they need only threaten violence to get their way. Man, as we said in the very first lecture, tries to improve his situation from his point of view. If men find that they can improve their situation by violence or the threat of violence, they are going to resort to those policies. The workers have done this in my country, and now the students are doing it in the colleges and even in the high schools. As long as the law is not enforced equally against them, there will be more and more such violence. If people think that they can get away with violence, they will undertake it whenever they are unhappy. Inflation, of course, is one thing that keeps people unhappy and makes them desperate.

Popular Ideology Suppresses Free Market Ideas

Q. Why are there so few people who believe in the free market?

A. Well, we have already answered that in part in answering the question on public education. Public education in itself, being a government enterprise, promotes further political interventions and opposes free market competition. The means of mass communication in my country, the newspaper, the radio and television stations, gather their material for the most part with the help of labor union members. Reporters of the major newspapers and press associations are all labor union members. The radio and television stations get their permission to operate from the government. Like teachers, they too are hesitant about saying things that are not popular with organized labor or the political party in power. In my own country we cannot be regularly employed on a radio or television program if we will not join the union. I am not against unions, but I am against privileges for the unions. As a result of such privileges those who expose the weaknesses of present union policies are not permitted to participate in any regular program. So the basic answer to the question is that for the most part the means of mass communication are in the hands of those who believe honestly and sincerely, but mistakenly, that the answers to all our problems are more government laws hampering free market competition.

Dictators and Majorities Can Both Steal

Q. Last night you said that we steal by majority vote. This expression hurts our democratic feelings in South America, where we fight life-long battles against the demagogic dictators who always have a state-intervention mentality of robbing the rich, of stealing through the bureaucracy. So far no questions. Your words should be, I suggest, “we are permitted to steal by decree,” meaning that we are in the hands of dictators.

A. I cannot comment on the situation here as I am certainly no specialist on Argentina, and I shall not be one until I get back in the United States. But for those who may not have been here last night, I commented on the fact that we have changed the commandment, “Thou shall not steal,” to “Thou shall not steal except by majority vote.” All governments tend to do what they think the majority want, and this includes the appropriation of the wealth of unpopular minorities.

Unemployment in a Free Society

Q. Can there be unemployment in a free market economy?

A. There can be unemployment of everyone who wants to be unemployed. But everyone who wants to work can find a job at a wage that somebody else is willing to pay. Now, we all think that we are worth more than other people think we are worth. But in this world we have to be satisfied with the judgment of others, and in a free market society we can always get that. As I mentioned earlier, there are many natural resources in this world that are not occupied or used because of the scarcity of labor; so labor, being scarce, is always in demand at a price close to the market value of its productivity.

Helping Some by Hurting Others

Q. When wages are held above the free market level by compulsory means and still there is full employment, is this because inflation makes real wages lower?

A. When all wages are higher than the free market level, there is not full employment. When wages go higher than the free market rate, the people cannot buy the same quantity of goods at prices that include these higher wages. However, when some wages are above free market rates, there are also some people who are underpaid. So all could be employed. But for every one who is paid a higher than free market wage, someone else has to be paid a less than free market wage. This is always helping some at the expense of others.

  • 1A question has been raised as to whether a police state dictatorship is an exception to this general statement. It is not. No dictator can long remain in power without popular acquiescence that he remains the best available alternative. Modern dictators and would-be dictators recognize this when they reach for control of the mass media and educational systems, while seeking to suppress their articulate opposition. Those who fail to attain and maintain popular acceptance are soon removed from office. Lenin, Stalin, and Hitler insisted on thorough indoctrination of the young, complete control of all media, and ruthless elimination of any presentation of an opposing ideology. By such means they successfully thwarted the efforts of their internal minority opposition to become a majority.
  • 2Donald R. Richberg. Labor Union Monopoly: A Clear and Present Danger (Regnery, 1957), pp. 37 and 132. The Supreme Court, in a 1921 decision written by Chief Justice (former President) Wm. H. Taft, stated it this way: “They (the unions) were organized out of the necessity of the situation. A single employee was helpless in dealing with an employer. He was dependent ordinarily on his daily wage for the maintenance of himself and family. If the employer refused to pay him the wages that he thought fair, he was nevertheless unable to leave the employ and to resist arbitrary and unfair treatment. Union was essential to give laborers an opportunity to deal in equality with their employer.” (American Steel Foundries Co. v. Tri-City Metal Trades Council, 257 U.S. 184, 204-1921.)
  • 3The Workers’ Story, 1913-1953 (U.S. Dept. of Labor, 1953), pp. 78, 79, 87, 90.
  • 4Published by the American Enterprise Assoc., Inc., p.2.
  • 5John Maynard Keynes, The General Theory of Employment, Interest and Money (Macmillan & Co., Ltd., London, 1936), p. 264.
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