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A Real Free Market Benefits Workers

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Hands are wringing over bleak reports that despite increased productivity, workers generally are losing ground: real median income — adjusted for government-caused inflation — is said to be falling. Meanwhile, corporate profits are skyrocketing, and the wealthiest are doing fine.

In other words, the benefits of economic growth are said to be distributed unfairly.

As the Economic Policy Institute (EPI), an organization that favors government activism, put it in The State of Working America: 2006/2007,

In short, historically high productivity growth and historically low unemployment have benefited compensation and wages very little. While productivity grew 33.4% between 1995 and 2005, benefits (health and pension) grew less than half that much and wages for typical workers grew one-third as much as productivity. After 2001, there has been basically no wage improvement for typical workers regardless of significant gains in productivity.

EPI blames “increased global trade, less union membership, and more low-skilled and high-skilled immigration.” Its remedy? EPI wants stronger unions, a higher minimum wage, and measures to tighten up the labor market. That can only mean control on migration into the United States and ways to discourage outsourcing labor to foreign countries.

For EPI the system isn’t working fairly. But what system is that? EPI would probably say “capitalism.” Most of its ideological opponents would probably agree.

Among people who favor capitalism, the most common response to the EPI study was the same as it has been to similar past studies. The Wall Street Journal and various pro-capitalist blogs brought out counter-statistics to show that things are fine. They faulted the naysayers by pointing out methodological flaws (such as comparing average productivity growth with median income) and omissions (such as noncash employee benefits, though EPI says it accounts for these). The statistical snowball fight goes on unceasingly.

Undoubtedly living standards for people at all levels are higher than decades ago. It’s hard to believe otherwise. Look at the products that large swaths of the population have: cell phones, MP3 players, improved cars, and so much more. The American Prospect, a “progressive” magazine, published a web article on September 4, “What’s (Not) the Matter with the Middle Class,” in which Stephen Rose of the organization Third Way writes,

What progressives generally say about the economy is unrelentingly pessimistic — stagnant wages, rising costs, overwhelming burdens of debt. It’s a message that doesn’t resonate with the middle class — not only because it’s overly negative (by itself political poison), but because it’s simply flat out wrong.. . . [Absolute] living standards for the middle class have only improved, even if relative increases in income don’t match the gains at the top.. . . It’s true that the middle class is shrinking — but that’s because more families are better off. The share of prime-age adults in households with real incomes above $100,000 rose by 13.1 percentage points from 1979 to 2004.

On the other hand, housing, medical insurance, higher education, and other things are increasingly expensive (thanks to government policies). And the only reason we wonder whether wages keep up with inflation is that the government inflates the money supply in the first place.

So which is it? Are average workers in good shape or bad?

They are definitely in better shape than the statist Left claims, but nevertheless, I find this debate about whether capitalism is fair to workers unsatisfying.

People inclined to dislike capitalism tend to embrace the bleak reports. People inclined to favor capitalism look for data that paint a different picture. That isn’t hard to do. Any economic situation is complex, ensuring that you can find statistics and time series to support your predilections. Data, which rest on assumptions that can be ideologically driven and otherwise suspect, are like scriptures or the Constitution: you can always find what you’re looking for. The result is an endless discussion that does little more than give people a chance to show their anti-capitalist or pro-capitalist credentials.

I suggest a new tack. If we don’t get the question right, we can hardly expect to get the answer right.

The system is fair to workers. The system is unfair to workers. It’s time to ask: what system are we talking about?

Leaving aside ambiguous labels such as “capitalism,” what do the data presume to depict? Considering that for a couple hundred years local, state, and federal governments in America have intervened in the economy largely in behalf of business interests, we may reply that whatever we call it, it is not a free market. If the outcome in recent years has been unfair (however that may be defined), then the blame is on government intervention.
Economic liberty versus regulation

In an unmolested market economy — one where all dealings are consensual — the “allocation” of wealth and income is the result of transactions. There is no literal allocation, because there is no storehouse from which a custodian distributes wealth according to some arbitrary standard. Wealth comes from the production and exchange of goods and services. If someone efficiently produces a good that many people willingly trade their money for, he becomes wealthy. His success results not from a distribution of money but rather from many discrete voluntary exchanges.

If each party to those exchanges was uncoerced, then, as Robert Nozick discussed in Anarchy, State, and Utopia, the resulting configuration of wealth is just. Taking a macro view of things, no “allocation” of wealth to different economic groups can be pronounced proper apart from supply and demand in market. The propriety, or lack thereof, of any “distribution” is determined entirely by the process from which that “distribution” came. Mere inequality of wealth or income cannot be grounds for condemnation. Thus the free market, built on the justice of self-ownership and voluntary exchange, necessarily leads to just outcomes. (We should bear in mind that any “distribution” of wealth is always a snapshot, subject to change as a result of entrepreneurship. The dynamic market process recognizes no vested interests.)

But we live in a regulated, not a free, market. When government undertakes to regulate a market-based system, it (1) compels exchanges (for example, through eminent domain and tax transfers) and (2) forcibly interferes with voluntary exchanges. So when government taxes us to provide subsidies to business, our preferences are overthrown in favor of someone else’s.

When it imposes import quotas, tariffs, patents, licensing, and other interventions, consumer choices are constrained and prices are artificially raised; for example, inexpensive foreign goods are kept out of the market, or new domestic producers are suppressed.

When government imposes taxes and regulations, it favors large incumbent firms over small firms yet to be started. And when it inflates the money supply it transfers purchasing power from average people to itself and special interests. Worker-consumers are harmed by any measure that protects incumbent firms from competition. Few such measures appear anti-competitive on their face. We must look below the surface to their actual effects.

As noted, there is only one test for whether an arrangement of wealth and income is just: is it the result of voluntary transactions? If so, there is no role for public policy, because that would mean forcible interference with people’s peaceful exchanges. If not, then the proper remedy is abolition of privilege and respect for liberty.

Whatever the trend in living standards for average workers in the reigning corporate state, we know that they’d be better off in a free economy. It is intervention, not the free market, that is biased against workers, because intervention inhibits the emergence of alternative consumer-driven opportunities, including self-employment options. While the statist Left looks to the supply side of labor (and complains that the labor market is not tight enough), it badly neglects the demand side. What makes workers wealthier is rising productivity plus uninhibited competition for their services. The statist Left misses this crucial point.

On the other hand, rising living standards do not compensate for the injustice of the corporate state. This is why the standard “pro-capitalist” response to the Left is unsatisfactory. If the response stops there, the Left’s suspicions will be confirmed that “capitalism” is the system of privilege for business and that pro-capitalists are apologists for that privilege.

Libertarians miss opportunities to win people to the freedom philosophy if they let the debate proceed in those terms. The issue is freedom and autonomy, not the absolute improvement in material conditions.

The corporate state, by design, inhibits competition and makes average workers worse off than they’d otherwise be. Thus the truly free market is the worker’s best friend.

This article originally appeared in the November 2006 edition of Freedom Daily. Subscribe to the print or email version of Freedom Daily.

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    Sheldon Richman is vice president of The Future of Freedom Foundation and editor of FFF's monthly journal, Future of Freedom. For 15 years he was editor of The Freeman, published by the Foundation for Economic Education in Irvington, New York. He is the author of FFF's award-winning book Separating School & State: How to Liberate America's Families; Your Money or Your Life: Why We Must Abolish the Income Tax; and Tethered Citizens: Time to Repeal the Welfare State. Calling for the abolition, not the reform, of public schooling. Separating School & State has become a landmark book in both libertarian and educational circles. In his column in the Financial Times, Michael Prowse wrote: "I recommend a subversive tract, Separating School & State by Sheldon Richman of the Cato Institute, a Washington think tank... . I also think that Mr. Richman is right to fear that state education undermines personal responsibility..." Sheldon's articles on economic policy, education, civil liberties, American history, foreign policy, and the Middle East have appeared in the Washington Post, Wall Street Journal, American Scholar, Chicago Tribune, USA Today, Washington Times, The American Conservative, Insight, Cato Policy Report, Journal of Economic Development, The Freeman, The World & I, Reason, Washington Report on Middle East Affairs, Middle East Policy, Liberty magazine, and other publications. He is a contributor to the The Concise Encyclopedia of Economics. A former newspaper reporter and senior editor at the Cato Institute and the Institute for Humane Studies, Sheldon is a graduate of Temple University in Philadelphia. He blogs at Free Association. Send him e-mail.