Book Notes: Why Wages Rise by F. A. Harper

Note: This book was written in 1957 and the numbers and analogies are from that era.

1. Labor Unions

Superficial Observation

The Past Century

2. Productivity

• Productivity simple case: Let’s consider first a lone pioneer instead of a single employee of GM.
  • Case 1: He is producing things entirely for his own use. What he produces (ex. potatoes, etc…) is his wage. The only way he could double his wage would be to produce twice as much. This is like saying 1 = 1.
  • Case 2: Now if a neighbor moves in, the two pioneers might trade with each other some of what they produce. Hence, their wage would be some fraction of the total produced. If they both trade 1/2 of what they produce, this is like saying 1 + 1 = 2.
  • Case N: As society scales, the same would still be true. However, since not all people produce the same thing or the same amount or some work alone while other co-operate, things get a bit messy to model. However, the basic rule of productivity which is centered around production still holds true.

Production comes first

Wages Parallel Productivity

• There is no way by which arbitrary action or edict could have raised wages by as much as one per cent, unless it somehow increased production.
• Divergence between the two occur when there is an errors in the data, since they are expressions of the same thing as illustrated in the Case 1 above.
• For larger economies (ex. USA), not all our national product goes for wage payments.
  • Roughly, about two-thirds of it goes for wages and salaries, with the remainder divided about equally between:
    1. Pay for current effort by those who are un-employed.
    2. Payment for the use of savings that have been invested in tools and equipment.

3. Dividing the Pie

• Higher wages come from increased output per hour of work. For how could consumption be greater than production?
  • Some persons work for themselves, using in full or in part tools provided from their own savings. And some persons work for others.
• The pie of personal incomes may be thought of as divided into two parts:
  1. One is the pay for work done currently.
  2. The other is pay for the use of savings — income from work done in the past and not used for consumption at that time.
• Some persons work for themselves, using in full or in part tools provided from their own savings. And some persons work for others. There are all sorts of combinations of income from these two sources.

Present Divisions of the Pie

• In the early 1900’s wage rates have risen with increased productivity at about 2.5 per cent a year. Thus in 6 years, the wage would equal 15% increase.
  • To put this in another way, productivity increases have raised wages perhaps 6 times as much as could possibly come from diverting to wages every cent of current returns for savings.
  • If the pie is fixed, wages can rise to at most 100% of that pie.

Adverse Effects of Savings

• Capital created from savings make possible a part of our production. The average wage would be $200 to $250 (as opposed to $4600) if there were not tools. These tools are created from savings.
• This teamwork between those who save and those who use the tools is the reason for our high and rising wage rates.
• Among what we call “savings” are government bonds, which in reality are investments in a deficit of the government — not a productive tool any more than would be your tax receipt.
• Over the last quarter-century the costs of government have nearly trebled in proportion to personal incomes, going up from 12 to 34 per cent. Any increase in tax that is taken from corporate or personal will reduce savings and reduce the funding of tools for future use.

History of an Idea

• An increased share of the pie going to wages, at the expense of the share for savings.
• No sane person is going to demand more wage from himself for his muscular work, at the expense of his management self or his tool-owning self.

Slavery Was Tried

• Somewhere along man’s historic trail some men began to enslave others to work for them. In those early slave-holding days each person was able to produce little more than enough to keep himself from starving, and so a master couldn’t take much of what a slave produced or he would have a slave no more.
• In more recent times the voluntary employer-employee arrangement has largely displaced slavery throughout the world. Some work for others at a wage. They may want to do so as a way of gaining the use of tools with which to work, prestige involved or because for some other reason the wage offered is more enticing than the rewards in prospect while working for themselves.

Labor and Surplus Value Theories

• The labor theory of value is often used in one way or another in bargaining for wages, which are now a form of price and therefore the object of higgling and haggling in the market, as is the price of wheat or potatoes. The labor theory of value assumes that labor is the essential ingredient by which to measure all value.

No Return on Capital

• Marx viewed return on capital in the same manner as a doctor views a parasite feasting on his patent. Hence, according to Marx:
  • Any share of the pie going to anyone other than the laborer, must be the result of a parasitical attachment by capitalists.
  • The capitalist owner who holds title to these material means of production can, in this way, claim ownership of the product. He can without parts of the profit as per his wish.
  • This is what he called surplus value:the part of production which, under private ownership, is confiscated by the capitalist from its rightful owner, the laborer.

Tools Make the Difference

• The labor theory of value applies well in historic times when tools were simple. But today, our tools are much better and a big part of our value creation.
  • Of our total output, perhaps as much as 95% is because of the use of tools. And this is at a cost of only about 15 per cent of total output, as pay to those who have saved to create these tools. That, and not Marx’s concept, is the miracle that creates a surplus of value.

4. Tools to Harness Energy

• All life on earth is developed, sustained, and powered by energy from the sun. And that is the beginning of the story of how man has harnessed energy to improve his level of living.

Conversation of Solar Energy

• Humans require a converter to change the sun’s energy into usable forms.
• All human food comes directly or indirectly from plants.
  • Plants are not, however, very efficient in doing this because about 10,000 units of the sun’s energy are required to produce and store ten units of energy in the grown plant.
  • Plans are in a sense, tools of mankind.

Animal Power

• So back over time man has discovered how to use the energy from the sun, first in plant form as food and then, through plants, in the form of animals for food and for toil.
• Another early form of releasing plant-stored energy was the burning of wood, coal, oil and gas.

Motive Power

• Most important among these new uses of deposited plant energy were methods of converting, first, heat energy and then other forms of energy into motion with which to propel vehicles and to drive moving parts.

More Energy To be Tapped

• With these new tools, the efficiency of going from sun -> plant -> animal became much more superior.
• Energy sources for man’s fools have come from: ingenuity, savings, and the work power of harnessed energy.

The Simple Idea of Tools

• The formula is simple: If a man can create a tool that makes it possible for him to produce in a day of work, say, twice as much of something as he could without the tool, he can have twice as much to enjoy.
  • Or more accurately, he can have twice as much to enjoy. Provided the machine makes it possible for him to produce double the output in enough less than a day’s time so that he can also maintain broken parts.
  • Maintanance also take away time from building another tool that will further increase the output per hour.
• Some part of output has also to be kept aside for savings = investments in new tools.
• Tools are only usefull in the marginal increase they add to productivity (see Ch 2.).
• In a free society the growth in the development of energy-use measures, in a rough way, the harnessing of productive power.

• This remarkable harnessing of energy, along with the idea of wage payments among specialists under relative freedom of exchange, accounts in great measure for the rise in wages in the United States over the decades.

5. Doing What You Can Do Best

• Endless variation in people creates the chance for endless cooperation, to the mutual advantage of participants. This opportunity can exist only as differences are understood and tolerated — allowed to blossom into the cooperation with which we are here concerned.

What One Can Do Best

• Co-operation simple thought example:
  • Case 1: Person’s wage is purely what he produces.
  • Case 2: If 2 people produce the max. of what they can produce and trade, they can effectively double their wage. Ideally, they produce something difference so they can do a full exchange.
  • Case N: As this society scales, the same would be true. However, it’ll be hard to keep that efficiency.

A Seeming Miracle

• Exchange of the goods one produces is not directly that of his own appraisal of its worth to himself, but reflects how others appraise it for themselves by access in the market.

Limits on the Process

The only limits to the extent wages can be increased by this process are these:

1. There is, of course, a limit to what a person — even the most talented — can produce. The more capable he is in a rare ability, the higher this ceiling becomes.

2. There is a limit on his ability to find other interested traders with products they have produced beyond their own wants.

3. There are geographic and other barriers to exchange throughout the whole of society.

Specialization Can be Overdone

• Even at the cost of some possible economic gain, some of one’s time and effort may well be devoted to repairing the intellectual and moral loss that sometimes is the price of specialization.
• Our economic welfare could fall by removing the means of attaining specialization. If persons should be prohibited from producing their specialties, or from trading them with others in the markets of the world, the fall could parallel the rise we have enjoyed.

6. The Lubricant for Exchange

Money Enters Trade

A Great Invention

• Money allows a deal to be made between two parties unknown to each other.
• Money lubricates the exchanging of specialties of production.

Different Moneys

• The more trade passes through one medium, the easier it will be for money to lubricate trade.

Adulterating the Lubricant

The Counterfeit Gains

• Factor like inflation reduce the value of money. If money is a medium of exchange of value, where does the value eroded from inflation go?
  • See section Inflation is a Tax in section 7.

Inflation and Wages

• Inflation affects wage earners in two ways:

1. The wage looses worth proportional to inflation.
2. The pension fund (aka savings) contracts proportional to inflation.

• However, more important the the above two points is the illusion of welfare that inflation creates.
  • Ex. a wage of $8/hr after 20 years of inflation at 10% is no better than $1/hr without the inflation. If one is fooled by this and raises his level of living from one to eight, he is living beyond his means.
• Inflation also affects contracts that extend in the future.

The Clipped Dollars

Wages in the US have risen for 2 reasons:

1. Increased production: adds buying power.
2. Inflation: adds an illusion of buying power from production.

A Major Disaster

• Efficiency of the lubricant of exchange (aka money) if retarded will destroy the monetary system.
  • When persons hoard money in anticipation that it will gain worth, or avoid it because of anticipation that it will lose worth, this miraculous lubricant cannot do its work.
  • The usual process that cause wages to rise can no longer operate until a new lubricant is found.

7. Contracting for Progress

Rich Uncles and Walfare

• Uses the methaphor that the state is a rich uncle with a large inheritance attained from saving. In this case saving = inflation.

Inflation Is a Tax

A Wage Contract for My Boy

The Way To Begin

The Erosion of Savings

Buying Power Diminished

Inflation in France

8. The Cost of Being Governed

Service Charges by Fiat

Uncertain Worth of Forced Sales

The Nature of Government Services

A Monopoly Power

Effects on Wage Rates

Government vs. Self-Control

• Suppose it were possible,to govern ourselves with the same proportion of our working time. Were this possible, the amount of income remaining to the worker for free choice in his spending — his pay after taxes — presumably could have risen at least twice as much as it has. Our increased capacity to produce, if allowed to operate to the full, could have doubled our increase in economic benefits.
• Why not govern ourselves more, and thereby be able to keep more of what we are nominally paid?
  • A dollar saved is a dollar earned.

9. Losing Pay Through Fringe Benefits

Needs - in Whose Opinion?

Compulsory or Forbidden

The Total Wage Concept

Your Share of the Pie

I spend It for You

Fringe Benefits

There are two types of fringe benefits:

1. Paying when no work is done: One type of “fringe benefit” is the spreading of your pay, which was earned while working, over periods when you do not work.

• This does not affect the total pay. However, it affects the frequency of pay.

1. Taking part of the pay to buy things he doesn’t want: Other type is benefit includes all sorts of things which became substituted for money pay, which you may spend for this of your own choice.

A Costly Convenience

Fringe Detriments

Little Welfare States

A Freeze on Opportunity

10. Leisure and the Better Life

• We don’t want inactivity, instead, our desire to be active at something other than our regular activity. We want to be free of what we are currently obligated to do, in order to do something else for a change.
• What most persons do with their leisure costs them money. Yet they probably are paying for the privilege of doing something that someone else gets paid for doing regularly for his living. Two persons might even pay a vacation expense direct to one another for reversing their regular activities.

Welfare and Leisure

Trend in leisure:

• Most of history, a person has to work most of his waking hours to provide for himself and keep himself and family alive.
• A hundred years ago in the US, a person had to do do about 3,500 / 8,766 (about 40%) of work to stay alive.
• In 1950, people work 2,000 hours out of which 200 (10%) are for staying alive.

The Choice of Leisure versus Thing

• This increased capacity to produce above the starvation level of existence allows people to choose over a wide area between more things and more leisure.
• The marginal return on survival after the 200th hour decreases. Moving on up the scale of working hours, a point is finally reached where more work and more things become less appealing than more leisure.

Variation Among Men

• Once basic survival is met people might choose leisure as opposed to increase in production (aka wages) as an improvement.

How much Leisure Chosen?

Unions and Leisure

Unionized Unemployment

On Vacation with Pay

Looking to the Future

• Automation and atomic power hold untold possibilities of this sort, unless a loss of liberty should terminate progress.
• We can surely see the danger of a serious leisure-disease developing among mankind, a disease which work formerly restrained. For work apparently has some sort of therapeutic quality so far as virtue is concerned. And its substitute under leisure seems not yet to have been found.
• Mental problems of all sorts, too, may in some important degree be the product of increasing leisure.
• So in conclusion, increased productivity has gone more and more into leisure in preference to a more sumptuous life. As a result, yearly wages are not nearly as high as they could be if we had not prized the leisure more, if we had not chosen it instead. But once having made the choice this way, leisure itself creates serious problems which are suggested without being resolved.

11. Pricing an Hour of Work

• The general level of real wages is determined by what is produced. Inflating pay beyond this point raises prices but does not raise the worth of the wage in buying power.
• The lone pioneer’s desire for some meat, some wheat, or a log cabin is the incentive which drives him to produce. Anticipating his future wants, he produces in advance, like a squirrel which gathers and stores nuts for winter. And in anticipation of years of future use, he makes himself some tools to aid in his labors and in the enjoyment of living.

Production Creates Own Market

• We are not lone pioneers.
  • We live, instead, in a complex economy. A person usually produces a specialty, selling most of it to many persons and buying his varied needs from many other persons.
  • And this leads to the unavoidable conclusion that production creates its own buying power in a free economy.

The Function of a Free Price

• The function of a free price is to accomplish in a complex economy of exchanges what the lone pioneer accomplishes in his separate existence — the production of what is wanted of each thing, and no more, insofar as is possible.
  • The function of price is to discourage production of unwanted items and to encourage production of what is wanted, to the extent that wants can be anticipated and production plans can be carried out.
• The objective of everyone in a complex society should be the same as if he were a lone pioneer — to adjust as promptly as possible and go on with production and living.

Example effects of free price:

The two simple ideas behind this chart are these:

1. Less of a thing will be wanted at a high price than at a low price, progressively.

2. More of a thing will be produced in anticipation of a high price than of a low price, progressively.

• Hence, economic welfare is greater at the free market price than at any other point. If prices are forced away from the point of the free price in either direction, that destroys economic welfare.

Wages Are a Price

• Wages are a price, they are subject to all the rules of prices and pricing, the same as anything else.
  • As wages are forced either above or below the free market point, there will be created either a surplus or a shortage of labor.
  • In pricing one’s work, wages are subject to all the influences and characteristics that affect any other price.

Bargaining for a Wage

• Bargaining over wages should have no other purpose, in terms of economic welfare, than to find the free market price for the labor involved.

Unemployment

• When wheat is priced above the free market level, the accumulation that is unsaleable at that price is called a surplus.
• When the comparable situation arises among the working force of a nation, we call it unemployment. This refers to the labor — perfectly good labor — which is going unsold at the wage-price.
• I would define unemployment as involuntary leisure of a person who is willing to work at the free market price.

A Willing Worker

The Demand for Labor

• This is not a fixed thing.
• Apparently the demand for labor is not of this one-to-one ratio. Two noted students of this subject who have studied it carefully — Douglas in the United States and Pigou in Britain — both arrived at similar results.
  • A consensus of their conclusions puts the demand for labor at something like three or four to one. That is, a decline of one per cent in wages would uncover new jobs for 3 or 4 per cent more work. And vice versa.

Too High a Price

12. Riding the Waves of Business

• Price has an important function to perform. It equates the wanting of things with the supplying of things.

A Powerful Force

Wages and Total Income

• Even a child knows that the higher his wage the more will be his income — except that it isn’t so. This would be true only if one could keep his job at the higher wage. If it were true that I could keep my job anyway, then an infinite wage would seem to be the ideal. The trouble is, however, that jobs are lost three times as fast as wages are raised.

Experience with Unemployment

• There is really a free market wage for each person.
  • Perhaps the best way to see how wage rate comes with free market rate is to measure the surplus of unsold labor.
  • In aggregate, we can look at the unemployment rate (i.e. unemployment of people who want to join the market).

The Danger of Controlled Wages

• It is clear from this evidence that the conclusions of Douglas and Pigou as to the elasticity of wages found confirmation in the tragic experience of the 1930’s.
• But keeping income up is not the same as keeping wages up, as we have seen. Incomes move down as wages move up from the free market point.

Why Depression Disrupts

• In a depression, the money supply starts to shrink.
  • If all prices were to drop by the same amount, no serious hard would be caused. Everything would then retain the same relationship as before to everything else, and business would go on about as usual except for the task of changing price tags on things, and such as that.
  • But prices do not all decline by the same amount. Our concern here is with wages, which fail to drop along with other things.
    • Since they comprise three-fourths of total personal incomes, the serious effect of excessive wages becomes extremely great on the economy as a whole. (see Ch 2. Wages Parallel Productivity).
  • Wages are to a considerable extent under future contract. Even without a contract, wage reductions are resisted strongly, even though with lower prices the lower wage would buy as much as before.

Profits and Unemployment

• In his surplus value theory, Karl Marx maintained that profits infringed on the welfare of the worker and should be reduced to zero.2 The conflict between this theory and the truth, as shown by experience, is revealed by the chart on unemployment and shares of the national income.
• The agreement between changes in profits and changes in employment is not exact, of course. But the similarity in a general way is clear. It definitely disproves the surplus value theory. Not only is the theory wrong, it is precisely upside down.

Sweeps of the Business Cycle

The Myth of Instability

• Business will undoubtedly continue to fluctuate in some degree in the future, controls or no controls. We can expect that. The problem is to adjust as quickly as possible to these changes in conditions, to whatever extent they are beyond our ability to foresee and to prevent.

Cycles Not all Bad

• Not all fluctuations in business are undesirable, to be prevented if possible. Take house building, for instance.

The Human Factor

• We should not worry about all such fluctuations in business at all. We should worry only about those fluctuations which are due to prohibitions on the rights of each person to work at a job of his choice at a wage mutually satisfactory between them. We should worry only about prohibitions on the spending of his income for what he wants most, among things offered by others who have produced them from their own labors.
• If we do this, business fluctuations will be reduced to whatever fluctuation people want — not being forced to build houses when they don’t want them, or being forced to get married when they don’t want to.
• Wages would then be as high and would rise as rapidly as is possible. Leisure, to the extent one can afford it and wants it, would then be chosen as each person so desires.