In last night’s law and economics seminar, we discussed the Supreme Court case of Adkins vs. Children’s Hospital, the 1923 case in which the Court declared unconstitutional a minimum-wage law enacted in 1918 by Washington, D.C. The seminar is an informal one that I’ve been holding for the past couple of years at George Mason University. It’s co-hosted by The Future of Freedom Foundation and the GMU Econ Society, a group of students interested in libertarianism and Austrian economics.
By 1923, the battle between the Progressives and the free-marketers was in full swing all across American life, including within the judiciary. By this time, the Progressive movement had made large strides in converting America’s economic system to a welfare state and regulated or managed economy. One of their early successes involved minimum-wage laws. While there were only a few states that had enacted minimum-wage laws by 1923, the direction was clear: America was increasingly moving in a statist economic direction.
We began the session with a discussion of the economic aspects of minimum-wage laws. I told the students that one of the most amazing things about this entire area is how liberals (or progressives, as they often now describe themselves) still hew to minimum-wage laws, given the fact that libertarians have shown beyond any doubt whatsoever how destructive these laws are to the poor, the segment of society that liberals claim to be concerned about.
In every economic transaction, including labor exchanges, people give up something they value less for something they value more. Thus, both sides benefit. What’s important to keep in mind is that value is always subjective — it lies in the eyes of the beholder.
What a minimum-wage law does is lock out of the labor market everyone whose labor is subjectively valued by employers in the marketplace at less than the artificially established minimum. For example, if the minimum wage was set at $100 an hour, employers would decline to hire everyone whose labor they subjectively valued at less than $100 an hour.
It’s no different at $7 an hour. People whose labor is subjectively valued at less than $7 an hour are not hired. They’re locked out. They’re sent home. How do they survive without working? That’s where welfare comes in. Putting unemployed people on welfare was how Progressives showed their concern for the poor.
Of course, as we’ve learned, sometimes welfare recipients stay on welfare for their entire lives, in large part because they never were able to get a foothold in the business world where they could have learned the skills, work ethic, and other traits that they could have learned if they had been free to work at a lower wage.
What’s fascinating is how liberals have such a blind spot when it comes to economics. For example, there is a 40 percent unemployment rate for black teenagers. Liberals see that and simply refuse to believe that that problem is rooted in the minimum wage. They convince themselves that it’s just a problem with America’s “free-enterprise” system.
We also discussed last night how the absence of minimum-wage laws are a way to break down racism among employers. Let’s consider a bigoted white employer who is required to pay $7 an hour. Given a choice between a nice, rich, white kid whose parents are members of the Country Club and a poor, scruffy, black kid whose parents are desperately poor, the bigoted employer is going to choose to hire the white kid. But what if the black kid says, “I’ll work for $4 an hour”? Then the employer has a difficult choice to make. If he nonetheless goes the bigoted route, he pays a self-imposed price for his bigotry. But at least the absence of the minimum wage law would enable the black kid to compete by offering to work at a reduced wage rate.
The minimum-wage law also prevents blacks in the inner city from establishing businesses in which they could hire kids in the neighborhood who would be willing to work for a small wage, which would enable them to learn how a business gets started, how it operates, and so forth. Thus, what we don’t see is the countless firms that never come into existence that could have competed against the well-established firms.
However, as we discussed last night, none of these economic arguments played any role in the Court’s decision in Adkins. That’s because it’s not the Court’s job to determine whether a particular program is beneficial or harmful. That’s the job of the legislature. It’s the Court’s job to simply decide whether the law is constitutional or not.
An interesting aspect of the D.C. law is that didn’t mandate a straight, across-the-board minimum wage. Instead, it set up a board whose job was to study the different occupations of women and children and set a minimum wage for each of those jobs. Thus, women and children would be receiving different minimum wages, depending on the particular job they were doing. If people objected to the wage being set by the board, they could appear at a public hearing to provide their input.
Why women and children? Because the proponents of the law said that these two groups of people needed to be taken care of by the government, much as a parent takes care of his children. That position, of course reflected perfectly the mindset of the Progressive movement.
The proponents of the law attempted to justify it under the police powers that historically had been attributed to sovereign governments—i.e., the health, safety, welfare, and morals of the people. Here, proponents argued that women whose wages fell below a certain level were likely to end up living immoral lives.
In the majority opinion, however, Justice George Sutherland rejected that line of reasoning. Pointing out that women had just secured the right to vote through passage of the 19th Amendment, Sutherland held that women were fully capable of taking care of themselves. He also rejected the notion that women who made less than an artificially established wage were likely to fall into immoral lifestyles. He also pointed out that the minimum-wage system that the D.C. government had established was entirely arbitrary and capricious given the manner in which minimum wages were set by the board.
Relying on the due-process clause of the 5th Amendment, which prohibits the federal government from depriving people of life, liberty, and property without due process of law, the Court held D.C.’s minimum-wage law to be unconstitutional, Under the aspect of liberty known as “liberty of contract,” people have the fundamental right to enter into mutually beneficial exchanges with others. By denying employers and employees from entering into a wage agreement that they wish to agree on, the D.C. government was unconstitutionally denying both parties of their liberty.
But it wasn’t a unanimous decision. It was a 5-3 decision, with one justice abstaining.
Four of the justices in the majority — Sutherland, Van Devanter, Butler, and McReynolds — would later become known as the “Four Horseman.” As the intellectual war between the free-marketers and the Progressives raged into the 1920s and 1930s, the Four Horsemen would lead the battle for economic liberty within the Supreme Court. They, along with Justice Owen Roberts, would be the ones who would declare much of Franklin Roosevelt’s socialist and fascist New Deal system unconstitutional.
Ultimately, however, the Four Horsemen could not withstand the enormous tide of the Progressive movement. The battle over economic statism and economic liberty would ultimately culminate in 1937 in the case of West Coast Hotel vs. Parrish, another case involving the minimum wage. We’ll discuss that case in the next seminar session.