It is naught, it is naught, saith the buyer: but when he is gone his way, then he boasteth (Proverbs 20:14).
Once again, Hazlitt returned to the issue of government price fixing. In Chapters 13, 15, 16, 18, and 19, price fixing was in the form of price floors. It is in this chapter, too.
In this variation on the same theme -- price floors -- Hazlitt invoked a slogan which is rarely heard any longer: "Workers must be able to buy back their product." It was never widely heard. He said that there were two sources of this slogan: Marxists and labor union leaders. Today, Marxism is dead, and most labor unions are, too. So, we no longer hear the argument.
Hazlitt did not say what the defenders of this idea proposed as a solution. Is the government supposed to raise the wages of workers by decree? All workers? Just some workers? By what percentage? The promoters of this idea never said what they meant. This is one reason why the slogan never caught on.
Hazlitt argued that this argument was a variant of the just price doctrine of the medieval world. Wages had to be just, the theologians said, meaning ethically righteous, meaning fair. But what is fair? The serious theologians of the Middle Ages, including Thomas Aquinas, recognized this problem, and they generally argued that market prices are just, most of the time.
Orthodox Marxist theorists never argued for economic justice. Marx argued that all morality is simply window dressing for class economic interests. The orthodox Marxists did not think that any tinkering with market prices by the state could solve the inherent economic problems of capitalism; only proletarian revolution would. They never talked about how prices would be set in the world beyond the proletarian revolution. Neither did Marx.
This left labor union spokesmen as the promoters of this idea. The best statement of this idea was made by Walter Reuther, the head of the United Auto Workers Union. He also was the head of the Congress of Industrial Organizations (CIO), the more militant of the two major American labor unions, the other being the AFL: American Federation of Labor. Reuther said this years after Hazlitt wrote the book. At a meeting at the Ford Motor Company in 1954, this exchange supposedly took place. It was published in 1955.
CIO President Walter Reuther was being shown through the Ford Motor plant in Cleveland recently.Reuther cited variants of this exchange in subsequent speeches. The original is close enough for economic analysis. We hear the same arguments today with respect to robotics and computerization. But no one today thinks the problem can be solved by hiking wages by law. The fear today is future massive unemployment at any wage level.A company official proudly pointed to some new automatically controlled machines and asked Reuther: "How are you going to collect union dues from these guys?"
Reuther replied: "How are you going to get them to buy Fords?"
The analytical error of Reuther's comment comes from this fundamental idea: capitalist employers are exploiting workers by using machines to replace them. We have heard this warning for several centuries.
Machines do not buy anything. Workers buy things. The economic question is this: "Are workers paid the value of their contribution to the production process?" If not, why not? More to the point, if not, how not? In a competitive market, how is it that one employer can exploit workers by not paying them what they are worth? Why don't rival employers "raid" the exploiter's operation by offering higher wages?
This takes us back to the issue raised by Hazlitt in so many chapters: "How are prices formed in a free market?" Then there is this follow-up question: "If the state interferes with this price-setting process, what will be the results?"
As always, I begin with the question of ownership, which is a legal issue that has economic ramifications. The reason why I repeat the following two sections is this: the error that Hazlitt was dealing with is the same one as before, namely, a government-mandated price floor.
One set of owners possess money: business owners. They may also possess capital equipment, which includes land and buildings. They possess business plans. These plans involve hiring human laborers.
Another set of owners possess the ability to deliver labor services. These people are eligible to rent out these services.
A third set of owners will decide at some point whether to purchase goods and services that have been produced by a combination of business capital and labor services. They will determine retroactively which sellers prosper and which do not.
All participants possess the legal right to bid.
The window is a product of a society's moral, legal, and cultural traditions and institutions. This window is known as the free market. Those with money to spend (buyers of goods) work out arrangements with people who want to sell goods to buyers (buyers of money).
In this system, people who hire workers seek to locate people who rent out these services at some price. Economic exchange always depends on an agreed-upon price. Buyers compete against buyers. Sellers compete against sellers. Only in the final stage of the hiring process does face-to-face bargaining take place: would-be employer vs. would-be employee. The prospective employer does not know how little money the prospective employee will accept, and the prospective employee does not know how much money the prospective employer will pay. In this zone of ignorance, there may be negotiating. But probably not. Time is not a free resource. Employers usually make this offer: "Take it or leave it. I am too busy to negotiate."
The employer acts as an economic agent of future customers. He will give them an opportunity to buy the output of his production process. The employer also acts as an economic agent of his employees. In order to earn money, employees must sell their services to customers. The employees do not know how to market their services directly to customers, but the employer believes that he does. So confident is the employer that he is willing to pay money to the employees to perform certain tasks, irrespective of the near-term decisions of customers. The business pays these employees until the lack of customers makes it evident to the employer that he has misjudged customer demand. Only then will he fire some or all of his employees.
The wage is a signal to other workers and other employers regarding the prevailing conditions of supply and demand. If this wage is a market-clearing wage, there will be no rival workers offering to work for a lower wage for the same job, and there will be no rival employers offering to pay more.
Hazlitt did not describe the stone. He argued that critics also never described it.
How are we to know, however, precisely when labor does have "enough to buy back the product"? Or when it has more than enough? How are we to determine just what the right sum is? As the champions of the doctrine do not seem to have made any clear effort to answer such questions, we are obliged to try to find the answers for ourselves.
He argued that the idea of a lack of purchasing power by workers is a variation of what he called the "purchasing power argument." Capitalism supposedly withholds from workers the full value of their production. This was Marx's argument, although Hazlitt did not identify it here: the argument regarding surplus value. Hazlitt zeroed in on the error.
In an exchange economy everybody's income is somebody else's cost. Every increase in hourly wages, unless or until compensated by an equal increase in hourly productivity, is an increase in costs of production.
This stone is another variant of every intervention by the state to secure wages that are higher than what are produced by the free market's system of supply and demand.
Hazlitt returned to his familiar critique of government price fixing.
This brings us to the general meaning and effect of economic equilibrium. Equilibrium wages and prices are the wages and prices that equalize supply and demand. If, either through government or private coercion, an attempt is made to lift prices above their equilibrium level, demand is reduced and therefore production is reduced. If an attempt is made to push prices below their equilibrium level, the consequent reduction or wiping out of profits will mean a falling off of supply or new production. Therefore an attempt to force prices either above or below their equilibrium levels (which are the levels toward which a free market constantly tends to bring them) will act to reduce the volume of employment and production below what it would otherwise have been.
This is the standard argument against price controls in all systems of free market economics. He referred to equilibrium prices. Equilibrium is a concept of physics. He meant market-clearing. Everyone who wants to buy at this price can do so, and everyone who wants to sell at this price can do so. There is neither excess demand nor excess supply. Only one price will produce this result.
Therefore, any attempt by politicians or bureaucrats to set a price higher or lower will produce excess. A price floor will produce excess supply over demand. The high official price lures sellers and drives away buyers. A price ceiling will produce excess demand over supply. The low official price lures buyers and drives away sellers.
If the state sets wages higher than the free market would produce, there will be unemployed laborers. Why? Because the law drives up production costs. Businesses fire workers who do not provide sufficient output to justify keeping them on the payroll. This is another version of a minimum wage law. In this case, however, it may not apply to all jobs. It may apply only to some jobs. The promoters of the slogan never said.
Hazlitt also added a discussion of monetary inflation. If the central bank creates fiat money, the price level will rise. Then there may not be unemployment. The artificially high wages will then not purchase as many goods as before. This means that real wages have fallen. Although he did not say this, his discussion meant this: if real wages fall, then we are back to square one. The market has established a market-clearing price. So, the critics will complain again. Labor is still not able to buy back its output.
The consequences of this idea were minimal. Almost no one ever understood it. It did not affect government economic policy in the form that we read it here. The critics were never clear on how high specific wages should be forced up by law.
If you do a Web search for the phrase, "buy back the product," and also search for "wages," you will find that most of the hits are links to this chapter of Hazlitt's book. In retrospect, he did more to give life to this slogan than any labor union leader, and surely more than any Marxist.
This is the most jumbled chapter in the book. Hazlitt gave lots of unconnected examples. They are difficult to follow. An example:
The belief that the price increase would be substantially less than that rests on two main fallacies. The first is that of looking only at the direct labor costs of a particular firm or industry and assuming these to represent all the labor costs involved. But this is the elementary error of mistaking a part for the whole. Each "industry" represents not only just one section of the productive process considered "horizontally," but just one section of that process considered "vertically."Thus the direct labor cost of making automobiles in the automobile factories themselves may be less than a third, say, of the total costs; and this may lead the incautious to conclude that a 30 percent increase in wages would lead to only a 10 percent increase, or less, in automobile prices.
This is not clear.
He neglected to go for the jugular. He did not offer this response:
In a free market economy, workers are paid enough to buy their production. Through competitive bidding -- employers vs. employers, workers vs. workers -- each factor of production is paid what most people think it is worth. There may be an error, but it will be corrected when an entrepreneur exploits this error by buying low in order to sell high. A worker who participates in any production process will be paid the full value of his unique contribution to total output. If he is not, then another employer will lure him away with a higher wage.
This is the traditional response of free market economists to this ancient analytical error. The critics of capitalism ignore the competitive bidding process, where suppliers of labor compete against each other, and buyers of labor compete against each other. Out of this objective price competition come specific wages for specific workers. Hazlitt here avoided the analytical question: "How are wages set?"
He identified one economic cost to society. If the government imposes additional costs of production by raising legal wages, the result will be reduced production. The wealth of society will decline, even though members of a specific government-favored group's income will increase. He repeated this argument in his chapters dealing with price controls, either price floors or price ceilings. It is a correct argument.
It is an incomplete argument. The major social cost is not higher unemployment. The major social cost is the violation of property rights. If the government makes it illegal to make and accept bids, then it undermines private ownership. How? By undermining disownership. A bid to buy is a bid to sell -- to disown. If you have no right to disown, then you are not a full owner.
Here is the problem with his line of reasoning. He resorted to full employment to challenge the legitimacy of this argument. He does this in every chapter on government price fixing. This weakened the entire book. In this chapter, he was explicit in a way that he was not in earlier chapters. He rested his case for the "best" outcome on economic output alone. This is a moral judgment. He sneaked it though the back door. He stated this clearly in this chapter. In the next-to-the-last paragraph, he wrote this:
As to the prices, wages, and profits that should determine the distribution of that product, the best prices are not the highest prices, but the prices that encourage the largest volume of production and the largest volume of sales. The best wage rates for labor are not the highest wage rates, but the wage rates that permit full production, full employment, and the largest sustained payrolls. The best profits, from the standpoint not only of industry but of labor, are not the lowest profits, but the profits that encourage most people to become employers or to provide more employment than before.
My approach is fundamentally different. I do not begin with maximum economic output as an ideal. Why not? Because economic output is a result. I begin with judicial theology: the question of what is morally right. Economists should begin with ownership, not output. They should define "best" in terms of ethics and law, not economic output. They should start with private ownership: its obligations, its moral foundations, and its consequences.
Economic analysis should begin with this issue: the legal system's criteria for linking human action with legal responsibility. Then it should trace the results of this legal order as they apply the principle of ownership/disownership in a world governed by scarcity.
The free market economy produces the highest rate of production, full employment, and the largest sustained payrolls because of the private ownership of property. The free market's pricing system, which is the outcome of competitive bidding, is in turn the outcome of the biblical judicial principle of ownership/disownership. The profit-and-loss system of economic sanctions is why the free market produces the best outcomes, as Hazlitt defined them.
Hazlitt did not start with the legal system. Few economists do. But I do. He did not start with ownership. Few economists do. But I do.
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