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Will Work for Less

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“Thought I’d get a piece of meat,” [says Ma].
“Got all kinds,” he said. “Hamburg, like to have some hamburg? Twenty cents a pound, hamburg.”
“Ain’t that awful high? Seems to me hamburg was fifteen las’ time I got some.”
“Well,” he giggled softly, “yes, it’s high, an’ same time it ain’t high. Time you go on in town for a couple poun’s of hamburg, it’ll cos’ you ‘bout a gallon gas. So you see it ain’t really high here, ‘cause you got no gallon a gas.”
Ma said sternly, “It didn’ cos’ you no gallon a gas to get it out here.”
He laughed delightedly. “You’re lookin’ at it bass-ackwards,” he said. “We ain’t a-buyin’ it, we’re a-sellin’ it. If we was buyin’ it, why, that’d be different.”

— John Steinbeck, The Grapes of Wrath

There are few more latently explosive issues than the popular belief in a right to a minimum wage and to overtime pay. Call it another legacy of FDR’s fascist New Deal, but since passage of the so-called Fair Labor Standards Act in 1938 the rank and file of the American public have been operating under the mistaken impression that they have a right to a federally imposed minimum return on their labor.

This doesn’t just make poor economic sense; it’s also immoral.

The essence of a free society is liberty of contract, and wage laws are some of the most egregious violations of that principle.

When people are left free to conduct their affairs without fear of violence, they quickly learn the value of engaging in trade, rather than plunder, to better their position in life. The material well-being of individual citizens is thereby best protected when they can seek terms of trade with whoever is offering the best deal, as no one would willingly enter into an agreement if he thought it would be injurious to his present standing.

There is a corollary principle implied here: Free people must also be treated as capable of making their own economic decisions.

However, the maze of labor laws that are imposed on American employers and employees, particularly the minimum wage and overtime pay, is justified under the opposite premise, namely, that when left to negotiate wage rates for themselves, people become helpless victims of capitalist exploiters. Left to its wicked wiles, we’re told, the free market would quickly have us all working as slaves on the corporate plantation.

The trouble with that position is that it runs contrary to everything we know about economic freedom.

For instance, we know that, morally speaking, a free person’s property — his money or his labor — should be his own, to do with as he pleases. This point was made quite assertively in the Declaration of Independence’s uncompromising support for the right to “Life, Liberty, and the Pursuit of Happiness” and again in the Due Process guarantees of the Fifth and Fourteenth Amendments.

We also know that when government takes a laissez-faire approach to business, far from suffering manipulation and privation the common man enjoys skyrocketing living standards.

Between 1840 and 1915, for example, with no wage laws in existence to protect workers from greedy businessmen and with millions of impoverished immigrants flooding into American cities and driving down the price of labor, the purchasing power of Americans’ wages actually tripled (even while working hours were declining), the largest increase in general prosperity ever seen in the history of the world.

How can this be?

A worker’s wages are only important insofar as they provide the means to purchase the things he needs to improve his quality of life. Laborers trade their time, skills, and energy for money, yes, but money is merely a medium of exchange which makes the transfer of wealth possible in an advanced economy. All the paper money in the world won’t make people better off, for it is the desire to gain wealth, represented by goods and services such as food, clothes, cars, houses, computers, health-care, education, and leisure, that motivates people to trade.

But in order to make material values available for general consumption and betterment, that is, in order to increase the prosperity in a society, it is imperative that capital be accumulated to fuel future productivity. “There are no means by which the general standard of living can be raised other than by accelerating the increase in capital,” wrote Ludwig von Mises half a century ago.

The only way to increase capital accumulation is through savings. A stagnant quantity of wealth will be rapidly dissipated. Obviously, the greater the savings, the greater the economic reward. This requires that the utmost level of productivity be extracted using the least amount of resources. Which means that, in order to achieve the greatest amount of long-run output, a producer must always be seeking ways to cut his costs.

“Savings mean benefits for all those who are anxious to produce or earn wages,” Mises explained in Economic Policy. [Emphsis added]

When a man … entrusts [his savings] to a savings bank or an insurance company, the money goes into the hands of an entrepreneur … enabling him to go out and embark on a project which could not have been embarked on yesterday, because the required capital was unavailable….

What will the businessman do now with the additional capital? The first thing he must do … is to go out and hire workers … causing a further demand for workers [and] a tendency toward higher wages.… [Emphasis in original]

Wage negotiations

Any individual seeking a job is hoping to get as much as he can in wages. Naturally, his potential employer is hoping to pay him as little as possible. This is not a malicious negotiation — it’s just smart business: To pay more than the market wage rate would give an unnecessary advantage to a competitor who keeps his costs lower and therefore makes greater savings. (As economist Donald Boudreaux has explained, raising wages in this manner also “distorts market signals” encouraging businesses to “bypass” a labor market it mistakenly believes is getting more than the “prevailing wage rate for such work.”)

When demand for labor rises relative to supply, wages will increase. In the opposite case, wages go down.

How far down? That depends on individual workers. By accepting a job an employee sends a signal throughout the marketplace that the remuneration he was offered, low as it may be, was nonetheless an adequate amount for him to agree to trade his labor to produce a particular good or service. Should the rate fall too low, however, workers begin looking elsewhere for employment, indicating that wage rates should be increased. Though it is surely in the interest of individual workers to receive the highest wage possible, it is in the interests of producers — and by extension, consumers, who must ultimately pay labor costs — to pay the lowest possible wage.

The marketplace is merely a means of distributing resources efficiently, and this interaction to establish wage rates plays a vital role in the operation of the market: it shows that resources are indeed being put to their best use. Spending more than is necessary is unarguably wasteful.
Government intervention

But this important transfer of information becomes obstructed when workers are not free to accept the highest as well as the lowest wage that the market can bear. Government can intervene and establish a minimum wage, but the repercussions of this decision cannot be escaped. To set a minimum wage rate is merely to deny employment to all of those whose skills do not warrant the prescribed cost. Likewise, overtime pay denies those workers who would like to put in more than the set number of hours, but whose productivity is not sufficient to justify the added labor cost, the chance to make more money.
Wages and the marketplace

Contrary to the beliefs of anti-capitalists, there is no single power dictating how and when wage rates will be determined. The term “free market” does not denote a governing entity; it is an abstract description of an inestimable number of transactions entered into by millions of free people, all of whom believe they will benefit from their particular trade. Who is fit to tell a man that he cannot accept an offer — any offer — to work?

Saying that the wage established by such means is “unfairly” low — and to back that belief up with the force of legislation — is as ridiculous as claiming it is “excessively” high; worse still, it violates the right of a free person to trade his skills for the amount of money he feels is sufficient to satisfy his wants and needs. And to the extent that it directs resources away from their most efficient use, to the extent that savings are lost, society at large is denied the benefit of greater wealth for its consumption.

The result is not, as some falsely claim, a general spiraling down of wages. This sophism has been widely contradicted by rising wages and living standards over the last two centuries. It will mean, at worst, a periodic lowering of wages in certain fields. What really happens when work is free to seek the lowest bidder is that a great deal of money is saved while the same amount of wealth — if not more — is still produced.

Consider a hypothetical manufacturer of widgets. He currently pays a worker $10 per hour to produce widgets. Along comes someone who says he will do the same amount of work for half the cost: he will produce for $5 per hour of labor. This arrangement costs the more expensive worker his job, but it also means that the same amount of wealth is still available at half the price.

As more and more jobs are filled by lower-paid employees, the employer doesn’t then stuff his increased profits, his savings, under the mattress — he invests in ways to produce even more goods and services to make even more money. The greatest benefactor, then, is the consumer (who, don’t forget, is also a wage earner). As the amount of wealth in society increases, laborers specifically are rewarded in proportion to the demand for their skills, but so too is the broader public enriched as the capital base is expanded and more and more goods and services are made available for their use.

Remember again that money is merely a measure of the wealth which it can purchase. As the amount of wealth increases, the value of the dollars used to purchase it will likewise increase. This is simply another example of supply and demand. As the supply of goods and services increases, the purchasing power of money relative to wealth grows. It’s a case of more wealth chasing fewer dollars, or a rising demand for money. (Inflation is the product of government control over the money supply, not an increase in wealth.)

Parenthetically, this argument drives to the heart of why domestic workers are so fearful of free trade — in goods, but particularly in labor. They know that a laborer from the Third World will not only work for less, but a lot less. Unfortunately, such “protectionists” have been highly successful at convincing most of their fellows that this is bad for everyone, when it is really just an age-old fear of competition driven by misguided self-interest. Rather than lash out at “cheap” labor, they would do well to remember that by accepting the wage they currently enjoy, someone asking for more was denied a job.

A free person’s money, like his labor, is his to do with as he pleases. Let’s leave employers alone to offer whatever they want for the jobs they need done, and trust the individual working members of a free society to decide what is the best return on their labor. It’s the wise and proper thing to do.

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    Scott McPherson is policy adviser at The Future of Freedom Foundation. An advocate of the Free State Project, he lives in Portsmouth, New Hampshire.