Chapter VIII: The Fictitious Commodities--Labor

This is the eigth chapter in Equity and Equilibirum: The Political Economy of Distributism. The draft of each chapter is being posted as it is written, in order to get some help from my readers about what works and what doesn't. All comments and critiques are welcome. For the scope of this project, see "Come Let Us Reason Together."

Is All Unemployment Voluntary?

One of the more curious conclusions of neoclassical and Austrian economics is that all unemployment is voluntary. Although this seems startling, it is a logical and necessary conclusion from their premises. If labor is a commodity like any other, and if all commodities have a market-clearing price (a price that would increase demand enough to clear all the goods offered for sale) then labor also must have a market-clearing price. Hence, if there is unemployment, it can only mean that workers are demanding more than the market price, and hence their unemployment must be considered voluntary. If they would only lower their wage demands, everyone who wanted a job would have one, albeit at a wage less than they would like. Therefore chronic unemployment can only be the result of workers who demand too much and employers who cave in to their demands. As Paul Heyne puts it:

[T]he quantity of labor supplied [is] chronically greater than the quantity demanded, principally because many employers have strong incentives to offer wage rates higher than the rates that would clear the market.¹⁠

In Heyne's world, unemployment is caused “principally” by greedy workers and compliant employers.

If Heyne and his fellow economists are correct, if labor really is a commodity like any other, then we would expect to see high employment rates associated with low wages, and low employment with high wages. We should see low-wage economies having both the lowest unemployment rates and the highest labor participation rates (that is, a higher percentage of adults in the workforce). But what we actually see is precisely the opposite. Both employment and participation rates are usually higher in high wage economies, while unemployment seems to rise as wages fall. The demand for labor seems to vary with its price, not inversely to it. Causation runs not from wages to employment, but from employment to wages. Lowering wages does not increase employment; only the prospect of selling more goods induces employers to take on more hands. And in general, more goods are sold when more people have jobs, and the better the jobs, the better the prospect of increased sales.

There are, of course, limits. Wages cannot be raised to any arbitrary amount, even for the purpose of improving the economy. There are three natural limits on wages:

• Wages cannot exceed the income of the firm; a firm cannot pay out more in wages than it receives in income, at least not for any appreciable length of time.

• Wages cannot displace the legitimate returns to capital, or capital will simply withdraw from the market. Capital, after all, is just prior-period labor, and deserves a return no less than current-period (actual) labor. Their respective rights are not opposed to each other, but spring from the same source.

• Wages cannot exceed the capital substitution rate, which simply means that at some point it is cheaper to use more machines and fewer workers.

The first two of these limits embody an aspect of equity. In the first case, it would be iniquitous to simply bankrupt the firm. In the second, there needs to be equity between capital and labor, or the economy cannot reach equilibrium, or at least not by economic means. This equity is easier to reach if we only keep in mind that capital is merely labor in a different form.

Wages and the Supply of Labor

If labor is not supplied to the market according to the “commodity” supply and demand curves, how is it supplied? The amount of work each person is willing to supply is an individual decision. The following four charts² depict the supply curves for four different kinds of workers:

The first chart is for a surfer whose goal in life is to indulge his passion for surfing. He lives in a crowded apartment near the beach with a few surfing buddies. By pooling their resources, they can give the market one or two days' casual labor a week and spend the rest of their time surfing. As wages rise, he actually gives less labor, not more; his needs can be met with less work, which allows him to devote more time to his “real work” of perfecting his surfing technique. This chart is labeled “surfer,” but it could just as easily be labeled “artist,” “poet,” or anybody who has a passion for something that exceeds his or her desire for material comforts.

The second chart represents a worker intent on buying a home. As wages rise, this becomes more of a possibility, and he is willing to give more hours up until the point that he has enough for the down payment. After that, an increase in wages actually produces less work, and he devotes more time to his family and their new home.

The third chart represents a worker on a remote oil platform working to gather as much money as possible in the shortest amount of time, perhaps to buy a house, start a business, or just to take a year or two off. Increasing wages will call forth more effort.

The fourth chart represents the mass of citizens who give their forty hours of work a week regardless of what the wage rates are. If they want more income, they look to promotions, wage increases, or better jobs rather than more hours.

This provides a rather chaotic view of the supply of work. Is there anyway to unite these four charts under a common supply curve? I believe there is. Take our supply chart and draw on it four lines, labeled “subsistence,” “comfort,” “security,” and “wealth.” These lines represent the wage at which each of these things is attainable. Of course, the definition of each of these lines will vary from person to person. For our surfer friend, the “subsistence” and “wealth” lines are identical, because he attains wealth when he gets enough to allow him to surf. For the home buyer, wealth is achieved with the new home, after which the supply curve bends back on itself. For the rigger, wealth is achieved, if it is achieved, only after he earns enough to meet his goal. The mass of workers in an advanced and relatively stable economy are working in the zone between security and wealth; hence, increasing wages does not call forth much of an increase in the hours of work, and what increases it does produce are balanced by losses from those who have passed the wealth line. Each of our workers are working along a different segment of the curve. Although the definitions of each line vary, there is nevertheless within any society a tacit, if imprecise, recognition of where these levels lie.

A few observations about this unified curve: We may note that wages below subsistence do not call forth much work, and even less loyalty, quality, or anything else. A second thing is that the curve is backward-bending at the wealth line. All supply and demand curves are backward bending. At some point, an increase in price will not produce an increase in supply; at another point, a decline in price will not call forth an increase in demand. This is called the Law of Diminishing Returns, and it is part of every economic curve, although one almost never sees it drawn in supply/demand curves.

Another implication of this chart is that people do not define themselves exclusively in terms of paid work. At some point (barring the outright pathological), they have enough, and devote their time to other things, usually unpaid work like families, hobbies, volunteer work, etc. We happen to live in a consumerist society, and we can define consumerism as the attempt to manipulate public perceptions to move the security and wealth lines “northwards” so that people will always feel insecure and poor, and hence will devote more of their time to paid work and more of their money to consumer products. However, this is not a “natural” condition for humans. It takes a tremendous amount of mis-education, usually in the form of advertising and social manipulation through the media, to convince people that their happiness lies exclusively in “things” rather than persons. Aside from being a tremendous drag on the economy, because the billions devoted to advertising competes with funds for productive uses, this view also distorts our view of work.

Finally, we can note that from the standpoint of the employer, the greatest gains come where wages are kept at the subsistence line. It is at this point that the smallest gains in wages produce the greatest gains in work. Employers tend to believe that it is in their best interest to keep wages in between the subsistence and comfort lines. This also leaves the worker with less security and hence greater dependence on the employer. This is, of course, a mis-perception, because, as G. K. Chesterton points out, “in cutting down what his servant demands,” the employer is also cutting down “what his customer can spend.”³⁠ They are the same persons. From the standpoint of the overall economy, balance is lost, and the gains to the employer are matched by losses to the over-all economy.

Work and the Worker

The economists' basic assumption about commodified labor is that people are averse to work; work represents a “disutility,” something to be avoided. As Jeremy Bentham, the true grand-daddy of modern economics put it, “Aversion is the emotion—the only emotion—which labour, taken by itself, is qualified to produce…love of labour is a contradiction in terms.”⁴ This aversion must be overcome either with the threat of starvation or, when that is not possible, with the promise of high rewards. The irony of this statement is that Bentham labored long and hard to write it, and did so despite the fact that no one was paying him for it. The truth is that people love to work. A man will come home from a hard day's labor and immediately go out to his workshop or into his garden. Or if he is truly weird, he will sit down and write books on political economy. But people love to accomplish things, they love to contribute, they love to demonstrate their skills and their mastery over some productive technique. Most of us find pure idleness difficult and disheartening, and we seek work even if no one will pay us for it. It is only since the invention of the television that people could be diverted enough from the boredom of idleness to engage in it for very long.

What man is averse to is not work, but work performed under degrading or oppressive conditions, work that is boring and repetitive, work that calls for no exercise of the mind, work that is not recognized for the contribution it makes, or where the worker himself is valued as no more than a cog in a machine. Managers schooled in modern economics will perceive these aversions to certain forms of work as an aversion to work itself, and they will apply the wrong organizational and managerial techniques to overcome an “aversion” that does not, in fact, exist.

The Economic Stork

The failure to recognize the value of unpaid work leaves modern economics without an explanation for the “production” of the most important economic factor: the worker, an economic “asset” that is “produced” entirely within the bounds of the family. The inherent individualism of neoclassicism shifts the focus of economic thought from the family, where it rested in Aristotelian and Scholastic economics, to the individual. However, the individual, by himself, is sterile and not a self-sustaining entity. Neoclassicism thus has no way to explain how new workers come into the economy, and hence it has no way to explain growth. John Mueller has characterized these shortcomings in economics as “The Economic Stork Theory” (EST). In the Economic Stork Theory, workers arrive in the economy fully grown, fully trained, and fully socialized. These stork-borne workers are a “given”; that is, there is no way to explain the growth in workers or their level of training and socialization, and hence little reason to support them with political or fiscal policies. Mueller describes the theory as follows:

I call this the Stork Assumption, since it literally means that adult workers spring from nowhere, as if brought by a large Economic Stork. Under the Stork Assumption, the accumulation of workers’ tools—buildings and machines—is the only possible source of economic growth that can be affected by policymakers. Moreover, under these assumptions the total tax burden not only should, but inevitably must, fall entirely upon the incomes of workers (who by assumption cannot avoid such taxes by having fewer or less-educated children, though property owners are assumed able to avoid taxes on property income by investing less in property). The Stork Assumption, not economic theory, underlies the perennial proposals to abolish taxes on property income, which are advocated by a cottage industry of (mostly my fellow Republican) economists centered in Washington, D.C.⁵

As a corollary to the Economic Stork Theory, the only “useful” work done in the economy is work done for wages or other economic rewards, and hence there are only two kinds of human activity, work and leisure. Thus, there are only two kinds of individuals in this theory: Partially Useful Individuals (PUIs) and Totally Useless Individuals (TUIs).⁶ The PUIs are partially useful because they spend some of their time at “work” producing things in the exchange economy. The TUIs, however, don’t “work” at all. Rather, some of the TUIs, otherwise known as “mothers,” spend their time in such leisure activities as taking care of the household pets; some of these pets are called “cats” or “dogs,” and others are called “children,” another form of TUIs.

Since the standard of living in the EST is the result of a positive capital-to-labor ratio, increasing the number of PUIs does not increase the standard of living unless the amount of capital is increased by at least an equal amount. In other words, you can increase the standard of living by decreasing the number of people, or at least slowing the growth of the population. Therefore the crucial element in growth is capital, and people are problematic. The policy implications are that capital should not be taxed, only people, in the form of labor or consumption taxes. This will help to discourage the formation of new PUI/TUIs, while raising the capital-to-labor ratio.

Mueller points out that the EST’s most glaring error is the failure to recognize that the family is the basic economic unit. And within the family, the choice is not so much between work and leisure as it is between production for exchange and production for use. Of course, economic theory simply has no way to account for production for use, even though it is actually the whole point of production for exchange; we work to provide money to buy meat and potatoes which we then use to produce dinner. Production for use does not show up in the GDP, but in fact the GDP presupposes such production. Indeed, production for use is the largest single segment of the economy, even though it appears in no economic table or government report.⁷ What the TUIs known as “mothers” are doing is crucial not just to the continuation of the economic system, but to the continuation of civilization itself. There is no economic growth without mothers and the job they do. Moreover, the social shifts of the last 50 years have moved us away from production for use to more production for exchange. Now, one may debate as long as one likes the soundness of this move into the workplace in terms of, say, women’s liberation. But as the feminists point out (quite rightly), if mothers were paid a salary for everything they do, they would earn a hefty salary indeed. But the attempt to monetize the work of mothers, to convert it from production for use to production for exchange, is futile and leads to endless debates that have no possible resolution. There simply isn’t enough money to replace what mothers do everyday. The transfer of work from use to exchange does indeed show up as an “increase” in the GDP, but not as an increase in any actual output of goods and services, and likely involves an actual decrease in such services and in their quality. Do day-care centers really provide the same level of “care” as does a family? Do fast-food stands really substitute for family meals?

Moreover, the policy implications are obvious. Differential rates of taxation between capital and consumption (or labor) mis-allocate resources and send the wrong signals. If you have the good fortune to be a robot, your “income” would be calculated by deducting the costs of your production, maintenance, and depreciation from your net receipts. But since you are merely a human, these expenses are treated with contempt by the taxing authorities and by the economic theories on which they rest. Children become a “consumer item” rather than an economic resource, and hence are not supported with the same policy care that is devoted to capital.

In sum, the attempt to commodify labor posits a relationship between wages and work that does not, in fact, exist; there is no equilibrium point determined exclusively by supply and demand. Hence, wages are not set by this curve; we will discuss in a later chapter how wages are really set. Moreover, commodified labor distorts human relations that do exist and upon which the entire economic structure rests. We end up devaluing both the worker and his or her family, and advancing policies which degrade both in favor of capital. A society that degrades the family degrades its own future. And if it does not reverse its course, it will have no future.

1Peter Heyne, Peter J. Boettke, and David L. Prychitko, The Economic Way of Thinking, 10th ed. (Delhi, India: Pearson Education (Singapore) Pte. Ltd, 2003), 462

2Hugh Stretton, Economics: A New Introduction (London and Stirling, Virginia: Pluto Press, 1999), 404

3G.K. Chesterton, The Collected Works of G.K. Chesterton (San Francisco: Ignatius Press, 1987), 59

4E.K. Hunt, History of Economic Thought: A Critical Perspective (Armonk, New York and London, England: M. E. Sharpe, 2002), 132

5J.D. Mueller, God and Money (Washington D. C.: ISI Books, 2007), 75

6Ibid., 184

7Stretton, Economics: A New Introduction, page needed