Dallas, TX. In the last installment, we maintained that the only means to economic equilibrium was the just wage: unless each person gets a fair proportion of the wealth he produces, there will not be enough purchasing power in the mass of men to clear the markets. We noted that in the absence of a just wage, the market will have to rely on non-economic means to achieve equilibrium: charity, government spending, and usury. Therefore we can accurately judge the failure of the just wage—that is, the failure of economic equilibrium—by noting the amount of non-economic means that are required to clear the markets. This leads us to the conclusion that the very size of government is a measure of the failure of economic justice. Indeed, one of the objects of distributism is to cut down on the need for gargantuan government.
At this point, the Austrian or neoclassical economist is likely to object that in order to enforce a just wage, you will need not a smaller but a larger government, one capable of setting the employment contract for each and every workplace. Such an arrangement is likely to abrogate the rights of both parties to freely bargain for a free and just wage. This critique cannot be passed off lightly, because under current conditions, they happen to be correct. However, the “current conditions” are neither necessary nor natural, and while the standard economists are proximately right they are ultimately wrong. But this takes some explanation of the current theory.
The Standard Theory
Without going too deeply into the model, we can note that the standard theory states that in a perfectly competitive, free-market environment, wages will tend to reflect accurately the productivity of both the workers and capital, and that each side would get the wealth it actually produces. The most famous proponent of this theory, called “marginal productivity,” was J. B. Clark, who put it this way,
Where natural laws have their way, the share of income that attaches to any productive function is gauged by the actual product of [that function]. In other words, free competition tends to give labor what labor creates, to capitalists what capitalists create, and to entrepreneurs what the coordinating function creates.1
Another way to state this theory is to say that wages determined by free market bargaining will be “just wages,” and equilibrium conditions will be satisfied. While space does not permit a complete critique of this theory, we can note that it is very easy to test empirically. According to the theory, over time, wages should rise with productivity.
But that is not, indeed, what happens. In the last thirty years, productivity has exploded for each and every category of labor, but the median wage has stagnated. Indeed, it is lower today in real dollars than it was in 1973. Hence, the standard theory is falsified in practice. Clearly, workers are producing more, but they are not getting any of the benefits; the rewards of increased productivity are going to a few people at the top, while the mass of men have seen no improvement. However, it is obvious that if people are producing more but earning the same, they cannot from their earnings consume all that they produce, and hence the economy will have to rely on the non-economic sources of demand; usury and welfare will replace economic justice as the means to equilibrium.
Why doesn’t free bargaining produce equitable wages? Adam Smith gave the reason a century before Clark proposed the theory. Concerning any dispute over wages, Smith says,
It is not, however, difficult to foresee which of the two parties must, upon all ordinary occasions, have the advantage in the dispute, and force the other into a compliance with their terms. The masters, being fewer in number, can combine much more easily. …In all such disputes, the masters can hold out much longer. A landlord, a farmer, a master manufacturer, or merchant, though they did not employ a single workman, could generally live a year or two upon the stocks they have already acquired. Many workman could not subsist a week, few could subsist a month, and scarce any a year without employment.2
In other words, Smith recognized that it was power, and not productivity, that determines the outcome of wage negotiations, and power will generally favor “the masters.” But if it is power that is arbitrated in a wage contract, then the solution is to redress the balance of power between the parties. To do this, we must look at the primary source of economic power, namely property.
Property: The Source of Economic Power
Property relations are the most basic economic relations, and all other economic outcomes will depend in large measure on the nature of the basic property relations. As Daniel Webster noted, “Power follows property,” and this is a simple truism that cannot be denied. All production depends on property, and even in the infinite “space” of cyber-space, one still needs a physical place to place the servers, the programmers, the transmission lines, etc. We tend to take the modern form of property for granted, but in fact it is a relatively recent innovation, dating back to 1535 and the seizure of the monasteries, an act which created a new form of property. This modern form of property was not codified in law until 1667 in the Statute of Frauds, and the dominant form of modern property, the corporation, did not gain its current status and powers until 1886, in a bit of Supreme Court legislation known to history as Southern Pacific v. Santa Clara County, a decision which made the railroads—and all corporations—practically independent and sovereign nations.
Before the reign of Henry VIII, property tended to be a wide-spread condition throughout society. Technically, only the king was a property-holder, in our sense of the term, while nearly everyone else was tenant, either a tenant-in-chief (a duke or other great lord) or a sub-tenant. We associate “tenants” with “renters,” people who normally have only thin, contractual, and precarious rights to the property they occupy, and who pay for these limited privileges the highest amount that the market will bear, an amount called “economic rent.” But this was not so then. Rights in tenancy were nearly as strong as outright ownership is today, and rents were not “economic,” but customary. That is, they were not related to the economic value of the land, but to the value of the services provided to the land: defense, improvements, courts, etc. They were more like a tax than a rent, and did not vary from year to year. We tend to think of a 15th century peasant as powerless and perhaps starving, a mere serf (slave). But that was not the case. Wages were, in fact, quite high. An artisan could provision his family with 10 weeks of work, while a common laborer could do so in 15, wage levels that were not seen again until the late 19th century.3
However, after the seizure of the monasteries, wages collapsed so that, at the close of the 16th century, it took an artisan 35 weeks and a laborer 42 weeks to provision his family.4 The seizure of the monastic lands and the enclosure of commons had dispossessed most of the peasantry of their traditional lands and rights. They became landless proletarians crowding into cities, which often could not provide them with sufficient work, or brigands on the highway, stealing to support their families. Rents became economic, with landlords squeezing out the last penny of value from the now weakened renters.
This brief history shows the power of property to completely change wage relationships. Men who have property—that is, the means of production—are free to negotiate a wage contract, or not, as they wish. But a man with no other means of support must accept the terms offered. In this latter case, the wage contract becomes leonine, that is, based on the inequality of the parties, and leonine contracts are always about power.5 The CEO does not earn 500 times what the line worker does because he is 500 times more productive, but because he is 500 times more powerful; the seamstress in a sweatshop does not earn a pittance because her productivity is low, but because her power is pitiful. Power, not productivity, is the issue in labor negotiations, and you cannot change wage relationships without changing power relationships. And the key to economic power is productive property.
We should be careful to note here that the issue is not about private property per se, but about the form and extent of that property. Property is natural to man, we might even say it is proper to him. It is as natural for a man to say, “This is my house” or “This is my land” as it is for him to breathe. Indeed, when a man cannot say, “this is mine,” then he really is less of a man; he might even find it difficult to breathe, or at least draw a fee breath; his rights and freedoms have been truly compromised. The Socialists and the Communists correctly analyzed the problem in terms of property, but they analyzed it in the wrong direction. Having ascertained that there were too few owners, they tried to ensure that there would henceforth be no owners. But the distributist takes the problem in the other direction; they wish to make the mass of men more properly human by giving them what is proper to a man, namely property.
The primary justification for private property is that it ensures that each man gets what he produces. As R. H. Tawney put it, “Property was to be an aid to creative work, not an alternative to it.”6 But when property becomes aggregated into a relatively few hands, when only a few control the means of production, property loses its proper function, and “ownership” becomes divorced from use. In our day, “ownership” is frequently in the form of a corporate share, which losses most of the qualities of actual ownership to become attenuated to a mere lien on a certain portion of the profits, or not, as the managers decide.7 Oddly enough, this puts not only the worker, but the investor at a disadvantage, as power passes to a new group, the über-managers, who sit on each other’s boards and set each other’s salaries. As John Bogle, the founder of the Vanguard investment funds, notes, the managers take an increasing share of the profits, leaving scraps for those who actually put their money at risk.8 The result is that the returns to both kinds of labor, actual labor and the stored-up labor of capital, are reduced, while “management” and speculation get the lion’s share of the profits.
The whole point of Distributism is the restoration of distributive justice to its proper place in economic science, and this means, at the practical level, the wider distribution of property. Only a man who has his own property—the land, tools, and training to make his own way in the world—only such a man can fairly negotiate a wage contract. If he has alternatives to what is being offered, then the resulting contract is likely to be fair, that is, to fairly represent his contribution to the productive process. Nor is this conclusion really at odds with standard neoclassical economic theory, if only the economists would take their own theory seriously. For at the base of all the standard economic theory stands the “vast number of firms” assumption, which presumes that the production of any commodity is spread over a vast number of firms such that none of them have any pricing power. They should all be price-takers and not price-makers. But the precondition of the “vast number of firms” assumption is that property be widely dispersed throughout society; without the latter you cannot have the former. If economists took their own assumptions seriously, they would be the first to protest in front of firms like Wal-Mart or Exxon. But they do not take their own theories seriously, because if they did they would become distributists or something very like it. Indeed, they would note the obvious: that the modern corporation has collectivized production beyond the wildest dreams of any Stalinist bureaucrat.
At this point, the standard economist is likely to object yet again that we have merely relocated the problem from one of government fixing wages to another government dividing property, and that the later is likely to be more tyrannical than even the former. Once again, this is a serious objection and must be seriously considered. That will be the topic of the next installment.
1 J.B. Clark, The Distribution of Wealth: A Theory of Wages, Interest, and Profits (New York: Augustus M. Kelly, 1899), 3 Italics in original
2 A. Smith, An Inquiry into the Nature and Causes of the Wealth of Nations (Amherst, New York: Prometheus Books, 1776), 70
3 J.E.T. Rogers, Six Centuries of Work and Wages: The History of English Labour (New York: G. P. Putnam’s Sons, 1884), 390
4 Ibid.
5 Belloc, The Servile State, 111
6 R.H. Tawney, The Acquisitive Society (Mineola, New York: Dover Publications, 1920), 59
7 Ibid., 62
8 Bogle, The Battle for the Soul of Capitalism
John,
How would a distributivist feel about Ralph Nader’s idea of moving taxes away from income and towards wealth? I’m a little rusty on the details but this could be a way of allowing workers to build up capital. I may be one of the Austrian/Neoclassical critics (though hardly an economist) but I see this (Nader’s idea) as a better alternative to the status quo. Perhaps the basis for some common ground?
Dan, I agree absolutely that income taxes are the worst form of taxation, for a variety of reasons. I address this topic in my new book, Equity and Equilibrium: The Political Economy of Distributism. I have several chapters critiquing both the current system and the proposals for “reform,” but my own view of what should be taxed is at http://distributism.blogspot.com/2009/01/chapter-xv-taxes-economic-rent-and.html
Basically, what should be taxed is economic rent, defined as “an amount paid to a factor of production greater than what is necessary to keep that factor in production in its current use.” The greatest single source of ER is ground rent.
John,
A Georgist solution! I have questions of its applicability outside of an urban setting but find the idea intriguing. Austrian’s have a love hate relationship with George (They love everything he ever wrote, except for his work on the single tax). See Rothbard’s critique here:
http://mises.org/rothbard/georgism.pdf
Not sure if Georgism would be as disastrous as he surmises but certainly raises some serious practice questions that might be helpful in framing your next essay.
Rothbard’s usual sloppy job. It would be tedious to go over all his errors, since it is only necessary to point out the first one. Socializing land rents would not eliminate rents (would that it would!) and land values certainly do not go to zero. Rent is rent, no matter who collects it, the community or the landlord. There is very little dispute on this point among economists; they all know the mechanism for ground rent, which always tends to confiscate all values over the margin of production and equalize returns to every parcel. Hence, a tax on ground rent cannot be passed along to the consumer, since rent already tends to its maximum; beyond that it cannot go. Again, this is not contentious.
What always amazes me about people like Rothbard is why they never permit themselves a peek at reality. Rather than theorizing about the problems of Georgism, why not look at Georgist states and noting what problems they actually? Why is reality excluded on methodological grounds from Austrian calculation? There are problems with Georgism, or rather with the actual implementations of Georgism that one finds, and these are the problems I noted in my essay.
There are GeoAustrians, like Fred Foldvary and Lindy Davis who would be glad to give you an Austrian perspective on Georgism.
John,
Rothbard is pretty heavy handed in his analysis I agree but the question of determining what the ground rent would be is a sticky one absent the price mechanism (Rothbard even notes that this problem is not such a problem in urban areas). I agree that Rothbard’s conclusions on this problem are off base and essentially hyperbolic, I think it is part of the mimetic rivalry between Georgists and Austrians. His critique is, however, important in that it is the only modern critique one is likely to come across in contemporary America.
The Austrian’s get hung up on the question of the price mechanism (Which is, to a degree, understandable). This is why it is really impossable for them to discuss taxation in any terms other than none (As in Rothbard’s anarchism) or less. I think we are agreed that taxes are necessary (no anarchists here) and (at least potentially) destructive to productivity. A Georgist solution to the problem is novel but not to be dismissed out of hand. I look forward to your next essay!
But that’s the point: The price WOULDN’T change; just who collects it. The elegance of the georgist solution is that it socializes rent but privatizes development. It this recognizes both the social and private character of land. Labor and capital get their full value, without taxes; only the pure rentier is taxed. This tax cannot affect the price (as taxes on labor and capital can) because rent is already at its maximum. What Georgism guarantees is that you could not have wealth without work, but that work would get the full value of the wealth it creates. The Austrians are right about price mechanism’s (although, they reduce the whole of economics to that), but Georgism has no effect on that mechanism, contra Rothbard.
Wait a minute dammit, I was just getting used to the idea of Distributism and its alternative to Austrianism and now I find I have another cavern to explore called Georgism….and maybe even Geo-Austrianism. Maybe the reason they call it the “dismal science” is there is no end to blind alleys…..at least as practiced by our New Age Bolshys in Foggy Bottom.
Your attacks on Rothbard induce gulps ..I always found his trenchant critique of the wooly-headed State very appealing. Garret Garrett, Albert J. Nock…the skeptical remnants I’ve come to enjoy. Your comment about the modern Corporation and its crypto-Stalinist tendencies is hard to dispute.
This is an interesting series of essays Medaille and I’m looking forward to getting beyond the motherhood issues to mechanics but take your time.
Dirk, you are correct that there is a proliferation of “isms” in economics, mainly for the reasons I mentioned in part II. Economics is the least “scientific” of all the humane sciences, and hence there simply is no standard of truth by which to integrate all the various points of view and objects of research. Questions tend to be resolved ideologically rather than scientifically, and hence the discipline breaks down into a series of contending ideologies with no means of resolving the differences between them.
As for Rothbard, critiquing the state is like shooting fish in a barrel: not a particularly challenging sport. The real question is what alternatives one presents. The problem with anarcho-libertarianism is that its anarchism prevents it from having any rational theology of the state, save nihilism. It poses every question in an “all-or-nothing” format, which always works to the benefit of the “all,” since there are not enough nihilists to vote for the nothing.
As for “mechanics,” I am not sure what you mean. That is what I thought I have been doing all along. I have two more parts planned, one on currently operating Distributist systems (never believe any social theory unless you can see how it works in practice) and one on how we can get there from here. If by “mechanics” you mean something like industrial policy, see, http://distributism.blogspot.com/2009/03/chapter-xvi-distributism-and-industrial.html
For a distributist solution to specific and current social issues (health care, in this case) see http://distributism.blogspot.com/2009/04/chapter-xvii-distributism-and-health.html
[…] The Economics of Distributism IV: Property and the Just Wage … […]
D.W.,
If its any small consolation Albert J. Nock was a Georgist.
I beg to differ on Rothbard. Yes, critiquing the state is like shooting fish in a barrel, if you or I were doing it. But to critique it with Rothbard’s zesty polemical flair was a singular gift. Unfortunately, he used his gifts for Libertarianism, which doesn’t even rise to the level of a worthy lost cause. It’s just dismal, stunted, failed ideology.
[…] But they certainly have a keen eye for the difficulties in modern economics. Some teasers from Part 5: Another way to state this theory is to say that wages determined by free market bargaining will be […]
AC, I will give Rothbard some points for humor, in evidence of which there is “Mozart was a Red,” his one-act send-up of the Cult of Ayn Rand: http://video.google.com/videoplay?docid=-5404826610265339909
Medaille,
Yes, by “mechanics”, I’m referring to functioning examples of the Distributist system and how they might function within the larger system but i am content with your pace of going from the general to the specific.
First, I am uncertain what you mean by “every category of labor,” but it seems to me that one counterfactual might be education labor. Would you say that there has been “increased productivity” from teachers in the last 30 years? If there has not, if productivity has actually declined, then it might make sense, on your terms, that real wages have declined in that sector, no? Sure, it is true that the “product” of the educational “industry” is a bit odd when compared to toy factories, but it should be clear from the example that 1) it is sometimes difficult to measure true productivity, and 2) at any rate not all “industries” have progressed in productivity.
My second criticism of your post, overall which I appreciate and learned much from, is that you’ve neglected another reason why wages may have stagnated: the value of products may not be static.
Here’s an example. Suppose every car maker’s productivity increased by 1,000. Does it immediately follow that just because productivity has increased, the wages should increase as well? Surely not in this case, for the world does not need nor should it pay for 1,000X as many cars as it currently makes. Wages depend not just on productivity, but on the value of the goods produced, and in some cases producing more of an item is simply worse for everybody.
You might reply that I speak of extreme situations and that surely wages should rise a little bit when productivity increases a little bit, but may or may not be true in most cases, but there is yet another factor relating to the dynamic value of goods, namely that the creation of other commodities can render existing commodities less valuable. So the invention of waffles can make pancakes less valuable and so pancake-cook wages might decrease, even if pancake-cook productivity increases! The question is of malinvestment, and the difficulty of being able to ascertain accurately the “true value” of goods, and therefore the “true value” of labor producing those goods, and therefore what your just wages are.
I say this as one who is looking for an alternative to corporate capitalism and would hope that these criticisms would help refine your position.
Albert, there are of course categories of labor for which the term “productivity” is difficult to apply in a manufacturing sense. Nevertheless, it seems to me to be grasping at ideological straws to hang your argument on such cases. Besides which, if the economy is more productive, then the value of the education increases which would equate to greater productivity.
You are confusing “value” with “price.” If each worker is producing more cars, then in theory the price of cars should decline, which is the same as the worker’s wage increasing. You must have one or the other, or you will not be able to dispose of the increased output economically, and will have to rely on the non-economic means of increased gov’t spending or usury.
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