A perennial weakness of the progressive Left is that, while they recognize the problem of maldistribution of wealth, they consistently fail to understand its root causes, and therefore their proposed solutions usually miss the mark.
Take, for example, the current fixation on raising the minimum wage. This issue has become a virtual litmus test for the Left in the United States. Anyone who resists the minimum wage orthodoxy is considered an ideological enemy and an ally of the capitalist class. But what the Left refuses to even consider is the possibility that raising the minimum wage might not have the effects that they believe it would have.
And what makes the matter worse is that issues like the minimum wage keep the Left focused on the wrong things. By putting all of their energies into tangential issues like the minimum wage, they end up completely ignoring the real causes of economic inequality.
The free-market system is one of the most powerful, beneficial creations in the history of mankind. The idea of harnessing self-interest in order to motivate individuals to behave in ways that benefit society is practically and theoretically sound. The problem is not the system itself. The problem is faulty implementation.
Every attempt thus far in human history to implement the free-market system has failed to deliver on its promise of general prosperity. This has happened for two reasons — 1) flawed systems of money and 2) the institution of private land ownership.
The unifying thread between these two distinct phenomena is that they are the both sources of unearned wealth — i.e. both result in enormous amounts of wealth going to people who have done nothing to earn it. That wealth flows into the pockets of undeserving individuals and is thus not available to compensate labor fairly. If all of the wealth that is maldistributed by virtue of interest on money and private ownership of land was redirected to workers, our economy would be completely transformed.
Unearned income is directly contradictory to the basic principle of free markets. The fundamental premise of the free-market system is that people should be allowed to enjoy and dispose of the full proceeds of their efforts. But interest on money and appreciation of land values are not the results of the efforts of individuals. Both are generated by society as a whole. And the fact that they are appropriated by private individuals is a violation of the basic logic of free markets.
If these streams of wealth were redirected into their natural courses by eliminating the root causes of their misallocation, the market economy would finally be able to deliver on its promise of general prosperity. And concluding that the free-market system doesn’t work just because we haven’t yet figured out how to implement it properly would be a tragic instance of throwing out the baby with the bath water.
A typical Leftist analysis goes something like this: Owners of capital use their economic and political power to stack the deck against workers and thereby take for themselves a slice of the economic pie that should go to labor. Therefore it seems obvious to them that the proper remedy is for government to step in and dictate to employers that they must share the proceeds of enterprise more equitably. It is a superficially appealing argument, but it is based on a fundamental misunderstanding of economic processes.
The reason why labor is perpetually underpaid is not because of selfish, unethical behavior on the part of businesses. After all, businesses simply attempt to maximize profits under the existing framework of laws and institutions. That is exactly what they should be doing, and if the free-market system was implemented properly such behavior would benefit society generally. The problem is that we have not implemented the system properly, and that has nothing whatsoever to do with the selfishness and greed of business owners. Rather, the root causes are a fundamentally flawed monetary system and an improper appropriation by private individuals of the earth, which by natural law should be the shared property of all living things.
The mechanism whereby our existing forms of money spread inequity throughout the economy is via the phenomenon of interest. Previous essays examined the question of why interest exists and how it functions. Rather than repeating what has already been discussed (see Money: medium of exchange vs. store of value and Does interest help people save?), this essay will pick up where those essays left off and extend the analysis to illustrate how the existence of interest leads to inadequate compensation of labor.
SUBSTANDARD WAGES ARE NOT DUE TO THE GREED OF BUSINESS OWNERS. THEY ARE DUE TO SCARCITY OF CAPITAL. AND SCARCITY OF CAPITAL IS A DIRECT RESULT OF THE EXISTENCE OF INTEREST.
This requires some additional explanation to make the mechanism clear.
Imagine that an individual has some excess cash. Suppose that this individual is faced with two investment opportunities. The first is to loan money to the government and the second is to invest in a new business. Let’s suppose that both investments are projected to yield a return of 5%. Which option will the investor choose?
Clearly, investing in a new business entails more risk than lending to the government. So if the anticipated returns of the two investments are the same, most investors will choose the option with less risk. Therefore, rather than funding the new enterprise, most investors will choose to lend their money to the government.
So, if the new business wishes to compete with the government in order to attract capital, it will have to offer a higher projected return in order to compensate investors for the additional risk. For argument’s sake, let’s say that this particular enterprise needs to offer a projected return of 8% in order to attract investors. This means that if the business is unable to convince people that it will be able to generate a return of at least 8% it will be unable to attract capital and will never get off the ground.
Now, let’s change the scenario. Let’s assume that interest does not exist. The government still stands ready to borrow money, but it only offers to repay the principal amount of the loan. It will not pay any interest. This fundamentally changes the situation facing a business that is looking to raise capital. Now, there will presumably be investors who are willing to accept the additional risk of investing in the business because they will be compensated for doing so in the form of a higher return.
Therefore, the existence of interest hinders the ability of businesses to raise capital by giving investors a more attractive alternative. If investors didn’t have the option of lending their money for interest, much more money would flow to businesses in need of capital. So the existence of interest causes capital to be artificially scarce for productive enterprise. Because interest exists, fewer business can attract funding. And fewer businesses means fewer jobs. And fewer jobs means less competition among employers to hire labor. And less competition among employers results in lower wages.
THAT is the reason workers are perpetually underpaid — NOT because businesses are selfish and greedy. Businesses are SUPPOSED to be selfish and greedy. And in a properly designed free-market system, the selfishness and greed of those businesses would result in more capital formation, more jobs, more demand for labor, higher wages and general prosperity.
While Karl Marx is generally considered an inspiration and intellectual beacon for the Left, in reality, he is one of its greatest enemies. Because, while he correctly identified the problem, he completely misunderstood its causes and therefore provided a fundamentally misguided set of solutions. Marx called for the overthrow of the free-market system, rather than its improvement and perfection. And, in spite of over a century of disastrous results in every country that has tried to implement his ideas, he still holds sway over a large swath of the Left. This is extremely regrettable.
As Silvio Gesell pointed out in The Natural Economic Order (1916), Marx’s contemporary Pierre Joseph Proudon came much closer to properly diagnosing the problem and pointing the way forward to a fairer, more prosperous economic system. Here’s how Gesell compared the two thinkers:
“Marx succumbs to a popular fallacy and holds that capital consists of material goods. For Proudhon, on the contrary, interest is not the product of material goods, but of an economic situation, a condition of the market. Marx regards surplus-value as spoil resulting from the abuse of a power conferred by ownership. For Proudhon surplus-value is subject to the law of demand and supply… According to Marx, surplus-value must invariably be positive. For Proudhon the possibility of negative surplus-value must be taken into consideration. (Positive surplus-value is surplus-value on the side of supply, that is, of the capitalist, negative surplus-value is surplus-value on the side of labor). Marx's remedy is the political supremacy of the dispossessed, to be achieved by means of organization. Proudhon's remedy is the removal of the obstacles preventing us from the full development of our productive capacity. For Marx, strikes and crises are welcome occurrences, and the final forcible expropriation of the expropriators is the means to the end. Proudhon, on the contrary, says: On no account allow yourselves to be deterred from work, for the most powerful allies of capital are strikes, crises and unemployment; whereas nothing is more fatal to it than hard work. Marx says: Strikes and crises will sweep you along towards your goal; the great collapse will land you in paradise. - No, says Proudhon, that is humbug, methods of that kind carry you away from your goal. With such tactics you will never filch as much as one per cent from interest. To Marx private ownership means power and supremacy. Proudhon, on the contrary, recognizes that this supremacy is rooted in money, and that under altered conditions the power of private ownership may be transformed into weakness.”
So, the fight to raise the minimum wage is a red herring. It is a distraction. Even if it is ultimately successful, it will not come close to remedying the problem it is meant to fix. And in the meantime it prevents the Left from understanding and addressing the real causes of economic inequality. Until they figure this out, they will be busy tilting at windmills while our flawed monetary system continues to relegate the majority of humanity to poverty and misery.
I'm bothered by the contradiction between "Therefore it seems obvious to them [Leftists] that the proper remedy is for government to step in and dictate to employers that they must share the proceeds of enterprise more equitably" with the next paragraph, "The reason why labor is perpetually underpaid is not because of selfish, unethical behavior on the part of businesses. After all, businesses simply attempt to maximize profits under the existing framework of laws and institutions. That is exactly what they should be doing."
The second part 100% explains the first part; changing the 'framework of laws' so that when businesses 'attempt to maximize profits' it can NOT result in 'labor [being] perpetually underpaid.' So why doesn't it seem obvious to everyone?
I do agree that raising the minimum wage is a blunt instrument, which with some unintended bad effects. There are other finer instruments available. Raising the Earned Income Tax Credit, which Republicans seem to support, is one. Leveling the ground so that labor unions can become stronger is another. Again I cite Denmark:
"The Danish model is a decentralized system in which pay and working conditions are established by collective-bargaining agreements between trade unions and employers’ organizations. Our unions are strong, mostly because employers and employees both gain from the relationship. If the labor agreements are not respected, workers have the right to go on strike and, conversely, the employers have the right to lock out workers. The state interferes only if negotiations break down. They rarely do."
https://www.washingtonpost.com/outlook/2021/03/08/denmark-minimum-wage-mcdonalds-aoc/