Free Markets and Labor

Free Markets and Labor May 1, 2008

Libertarian and Austrian School economist Thomas Woods offers what he calls a Catholic Defense of Free Markets over at InsideCatholic.  I will delve into parts of it here.

A proposal that arises in many Catholic circles is for a “living wage,” which would allow a worker sufficient income to allow his family to live in reasonable comfort. Just the other day I came across an article in a traditionalist Catholic newspaper offhandedly calling for this very thing. Not even for a moment did the author suppose that the matter could be more complicated than this, that there might be any negative consequences, or that an entire field of study exists whose purpose is to understand the various interrelationships that constitute the nexus of human exchange. Wages aren’t high enough? Why, we’ll just pass a law and force them up.

Vainly barking commands at the economy cannot make reality otherwise than it is. We may as well harangue the law of gravity for dashing our hopes of soaring through the air. All people of good will would be delighted if suddenly, for the first time in world history, everyone earned a wage we considered comfortable. But if the human will alone could make everyone prosperous, then what Bangladesh lacks is not capital and secure property rights but enough protests and vigils. In what other field do Catholics feel justified in making solemn pronouncements without knowing the first thing about the subject at hand?

I have half a mind to just excerpt all the condescension.  Unfortunately I would probably run afoul of fair use.  Let’s unpack this a bit.  One presumes he is holding the U.S. or at least the Western world in contradistinction with Bangladesh here.  Since the U.S. does have secure property rights and enough capital to consume over a 1/3 of the world’s energy, are we still in a state where it is possible for the poor to enjoy equity?  Is he seriously arguing that the reason we have people going untreated for cancer in this country is because we lack a sufficient capital infrastructure to support it?  Then what is he arguing? 

I lack the space here to explain just how destructive and ill-considered living wage proposals are.

In other words, the actual defense is not going to be put forth, nor is he actually going to engage his critics.  But he will give his happy talk about what he knows, which I’m sure is valuable for those enured with Austrian economics.

What I can explain is why a market economy tends to make real wages rise — and show that the process has nothing to do with, and succeeds very much in spite of, the countless interventions into the economy that are supported out of a combination of ignorance and envy. …

The forklift made it possible to move and stack far more pallets than a worker could have done in the past, and to reach heights that would have been impossible with his bare hands. Likewise, a steam shovel can do the work of many men with regular shovels.

So what the bishops and everyone else who isn’t an Austrian doesn’t know is that productivity improvements allow for an increase in the standard of living.  The only problem is on the empirical side we aren’t seeing these productivity improvements being passed along to the workers in this country.  During the Clinton years almost the entirety of the wage improvements among the poorest 40% were a direct consequence of the minimum wage hike.  This was despite massive productivity improvements.  In England, incomes among the poor grew at the same rate or slightly better than the wealthy.  (See here.)

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  • I lack the space here to explain just how destructive and ill-considered living wage proposals are.

    Wow.

    Good post!

  • Policraticus

    Good thoughts, M.Z. The problem, however, will be that those who already agree with the thrust of Woods’ argument will likely overlook his reticence in terms of answering the real objections to his position. This is a move that emulates Milton Friedman and Ludwig von Mises, who likewise either dodged or dismissed the toughest objections to their systems.

    A few of my own thoughts:

    Placing aside Woods’ caricature of “the Left” (which Left? which leftists?), I couldn’t help but notice the anachronistic reading he gives to Pope Leo XIII’s use of “private” in terms of the right to property. Rather than engaging the context of Leo XIII’s remarks or even bothering to understand the raging debate among capitalists, socialists and mutualists over property as “possessed,” “used, and “privatized” that characterized economic discourse at the turn of the twentieth century, Woods extracts and isolates words from their matrix of meaning. So by equating Leo XIII’s private property” with his own, 21st century understanding of “private property,” Woods sets up the narrow boundaries of interpretation, manipulating Leo XIII’s writings in his favor.

    Woods’ understanding of the proper domain of episcopal authority is conflated with the proper application of infallibility. In other words, faith and morals is the scope of infallible teaching; the authority of the bishops–which the Church has emphasized at Vatican II and in the papal teachings of John Paul II and Pope Benedict XVI–extends into every sphere of human action, for the implications of revelation are present in every aspect of nature. Woods again manipulates and conflates in order to bolster his opinions. Remember, infallible teachings are a species of authoritative teachings. We are obligated to believe and obey more than just infallible decrees.

    As M.Z. points out, Woods skirts the issue of living wage. Why? I don’t want to speculate, but I can say that this avoidance attenuates and “defense” of free market.

    I’ll stop there (that’s just the first page of Woods’ essay). What I hope we can gain from this is that there are good, solid defenses of economic theories and practices out there. Woods’ just isn’t one of them.

  • Morning’s Minion

    Tom Woods falls into the trap of somebody who knows not much economics, but a lot of ideology. Basically, he is arguing Economics 101: the labor market is like any other markey, with a price (wages) that clear labor supply and labor demand. Unfortunately, if Woods had actually studied economics, he might realize that while this is a good starting point, it is a wholly inadequate explanation of how labor markets work. The current trend among labor economists is to model bargaining power: wages are the outcome of bargaining between workers and employers. The stronger the bargaining power of workers, the higher the wage. And this has a lot to do with the power of unions.

    Ironically, this was all anticipated by Leo XIII in Rerum Novarum. Leo strongly denounced people like Tom Woods who argued that the market wage was natural and just– it was rather the outcome of unfair bargaining. Under a Catholic corporatist setting, corporations and unions would sit and bargain as equals. That happens in many European countries. And guess what? Inequality is dampened, and unemployment is not higher than in the US.

    Shame on Woods for resurrecting an idea ahot down by over a century of Catholic social teaching.

  • You know, it is pieces like these by Woods that I often wonder where does the common good fall here? Is the common good defined as making sure that “the inoffensive principle of peaceful, non-coerced exchanges between rightful property owners” is maintained at all costs or making sure that people have enough means to sustain themselves and their families? Which one is more important? What is the true end of the free market? Is there one?

    Why is it so “complicated” for a “traditionalist Catholic newspaper [to call] offhandedly” for people to have a “living wage”? We can’t ask for anything less than this if we are to call ourselves Christians, that is. The true end of economics is to serve man and not the other way around.

  • SB

    “Living wage” for who? For everyone? Should I have been paid a “living wage,” by order of the state, when at 16 years old I was flipping hamburgers in a local fast food joint while living at home with my parents? Or is a “living wage” just for heads of households? (But wait, that’s discrimination, the one thing that liberals oppose with all their might.).

  • Brett

    I only briefly skimmed the article. But I have to say, he lost me at the title. Call me reactionary if you like, but Catholicism doesn’t defend markets, it defends people… or to say it positively, it presents the Church’s teachings on the goodness of God and subsequent goodness of His creation, especially those made in the image of God.

    Katerina’s last line could not have been better said. To serve man.

    It reminds me of that Twilight Zone episode when the alien book translated “To Serve Man” is discovered to be a cookbook. Well, that is what economic life in America is like…it is cannibalism for self-gain and it is defended by idolatrous claims to the invisible hand of the free market. That is the wrong way “to serve man”!

  • Blackadder

    Only around 5% of workers make the minimum wage, so claiming that all the wage increases for the bottom 40% of workers during Clinton were due to a minimum wage increase seems lacking. The problem with comparing productivity gains for the overall economy with the wages of a particular group (low wage workers), is that a) it fails to taken into account increases in non-wage benefits, and b) productivity gains aren’t spread evenly throughout the economy.

  • Blackadder

    Contra Morning’s Minion’s assertion about where the economic profession is on the subject of wages and labor, here is Paul Krugman (from the Accidental Theorist):

    “Part of the problem [with resistance to the market economy] is that many people are still unwilling to accept the idea that the labor market will not function well unless it is allowed to behave more or less like other markets. But this is not surprising – after all, not many people really understand the logic of markets in any case; they do not understand the process by which supply and demand often (not always) come into balance without any special encouragement.”

    And here is Krugman again, this time specifically on the topic of the minimum wage:

    “So what are the effects of increasing minimum wages? Any Econ 101 student can tell you the answer: The higher wage reduces the quantity of labor demanded, and hence leads to unemployment. This theoretical prediction has, however, been hard to confirm with actual data. Indeed, much-cited studies by two well-regarded labor economists, David Card and Alan Krueger, find that where there have been more or less controlled experiments, for example when New Jersey raised minimum wages but Pennsylvania did not, the effects of the increase on employment have been negligible or even positive. Exactly what to make of this result is a source of great dispute. Card and Krueger offered some complex theoretical rationales, but most of their colleagues are unconvinced; the centrist view is probably that minimum wages “do,” in fact, reduce employment, but that the effects are small and swamped by other forces. What is remarkable, however, is how this rather iffy result has been seized upon by some liberals as a rationale for making large minimum wage increases a core component of the liberal agenda.”

  • Thanks for linking to this, MZ. It’s a very interesting article.

    In regards to your and Policratus’ fear that he has no interest in making an argument as to why a just wage law might be destructive, in you might have missed the parens right after the sentence you quote:

    I lack the space here to explain just how destructive and ill-considered living wage proposals are. (I did, however, write a chapter on the subject for Philip Booth’s collection, Catholic Social Teaching and the Market Economy, published by the Institute of Economic Affairs; the whole book is available for free download here.)

    I have not read it yet, but he does apparently make the attempt that you wish to see him make.

    Overall, it’s a rather chipper article in regards to markets, and so I can understand why it failed to allieve the concerns of many of the authors here. I think he would have done well to take his opponents concerns on in more depth — though given the length of the article that might not have been possible. (I’m curious to read the linked book chapter.)

    What I did like was his point about some elements of economics being akin to physical laws such as gravity — one may not rail against them to any particular effect. So for instance, MM brings up unions as proof against the claim that labor is a market. Certainly, one may advocate that unions bargaining with large employers results in more equitable pay (I’d disagree, but one may argue it.) However what MM surely knows yet glosses over is that this in no way gets around the market laws that Woods is talking about. The reason that unions are able to “bargain as equals” with employers in Europe is because they have succeeded in limiting the labor pool. By constricting the supply of labor (by limiting it to union members) and then setting demands as to under what conditions they are willing to work, they succeed in bargain by _using_ market laws to their advantage: they corner the market on labor for a given employer or industry and then use that position to get what they want.

    So really, MM’s point underline’s Woods’, though clearly MM would like to do different things in the context of market laws that Woods would.

  • In 2000 the person at the 40th percentile earned $33,000. ( Source ) This is roughly 300% of the minimum wage. You may wish to argue that the minimum wage has no impact on a person making $16/hr. The impact is certainly wider though than the actual group who were originally making below the minimum wage.

  • Morning’s Minion

    A couple of things in response to Blackadder and Darwin.

    First, a question of semantics. The labor market models with which I am familiar are indeed “market” models– they have labor demand and labor supply and a clearing wage. But relative bragainiing can affect the relative position of these curves and thus influence the wage outcome.

    Second, the Europe issue. It is not the case that large scale union bargaining leads to higher unemployment– if anything it goes the other way. The reason is that unions looka fter their own and know that demand excess wages would lead to unemployment– but the bigger the union (or more technically: the more centralized and coordinated the bargaining framework) the more it takes employment into account.

  • Darwin,

    Unfortunately a reading assignment isn’t an argument, and I’m not criticizing you because you weren’t the one who offered the assignment. Mr. Woods claimed to be offering a defense of free markets; I attempted to address what he did argue.

  • MM,

    On Europe, it seems to me that you yourself have written on a number of occasions that unemployment in Europe is in fact much higher among those under 30 and over 55. The over 55 set may be the result of happy early retirement, but I’ll admit that the under 30 element bothers me (especially as someone whose 29 with five other people to feed.)

    Yes, unions try to do a good job of keeping their members from being laid off — but one of the ways they do that is by making sure that not too many new workers come in, and that people move up slowly, keeping their place in line. That may look great if a worker is 45 and simply wants to do his 35 hours a week and not worry too much about performance quality, but it’s very rough on people who are young and want to get into the workforce and make enough to support a family — and find themselves stuck behind people who are coasting along on seniority.

    Now, this is anecdotal, but the number one complaint of my co-workers who are immigrants from Europe (France and Belgium) is that the labor market stinks if you’re young and is designed to benefit most middle-aged people who don’t want to bother to exert themselves.

    But when I said that unions function by limiting the labor pool, I didn’t so much mean forcing people into unemployment, but simply that the reason why unions work is because they artificially limit the supply of labor to a given employer, which gives the union the bargaining power to drive wages up.

    MZ,

    I guess I took it that just wage laws were tangential to his main point, and that was why he just linked to something else. I have no idea if his argument is good, I just wasn’t sure it was fair to suggest that he had no desire or ability to address it when he directly linked to his attempt to address it. (Like you, though, I definitely find it annoying when a blogger hands down a “Go read all my other stuff” command.)

  • Blackadder

    Mr. Forrest,

    No doubt an increase in the minimum wage can have ripple effects raising some wages above the set minimum. Showing that all wage increases for the bottom 40% of workers during the 1990s were due to such ripple effects, however, requires more than mere assertion.

  • Blackadder

    Whether or not widespread union membership helps raise wages is kind of beside the point. The question is whether “living wage legislation,” i.e. making it illegal for employers to hire someone at less than a particular wage, is a good idea. On that score, I would point out that quite a few European countries (e.g. Germany, Norway, Italy, etc.) have no minimum wage laws.

  • Blackadder,

    Ravi Batra of SMU goes over the minimum wage pretty extensively in his book “Greenspan Fraud”. I’ll have to check it tonight.

  • Blackadder

    Mr. Forrest,

    Based on the title, I can’t say the book sounds promising, but you’ll have to know what he says. Here, btw, is what Card and Kruger (authors of the studies purporting to show a positive effect of minimum wage increases on employment) have to say about the extent of the law’s impact:

    “The minimum wage is a blunt instrument for reducing overall poverty, however, because many minimum-wage earners are not in poverty and because many of those in poverty are not connected to the labor market. We calculate that the 90-cent increase in the minimum wage between 1989 and 1991 transferred roughly $5.5 billion to low-wage workers…. an amount that is smaller than most other federal antipoverty programs, and that can have only limited effects on the overall income distribution.”

  • Blackadder

    In defense of Tom Woods, his point about increased productivity being the root cause (in general) of increases in the standard of living may seem obvious once stated, but I remember it hitting me like an epiphany the first time I heard it explained. As Orwell once put it, sometimes the restatement of the obvious is the first duty of a writer.

  • Morning’s Minion

    Productivity explains virtually all of living standard increases, which is why I always point to that indicator to show that the policies of Reagan did absolutely nothing to benefit productivity.

  • SB

    What presidential policies improve business productivity, anyway? Other than deregulation and encouragement of overseas relocation, both of which you presumably oppose?

  • I’m not quite sure I want to chase that rabbit. There are number of industries like finance and insurance that just wouldn’t exist without government regulation. The National Science Foundation funds a lot of the research that ends up giving us a lot of new inventions. NASA and the Defense Department share a lot of the credit for many of our machining improvements. Some closed markets were actually good like AT&T and rural electrification.

  • Policraticus

    Or is a “living wage” just for heads of households? (But wait, that’s discrimination, the one thing that liberals oppose with all their might.).

    Other than deregulation and encouragement of overseas relocation, both of which you presumably oppose?

    How unoriginal…more evidence that many cannot think beyond the conservative/liberal divide.

  • Morning’s Minion

    But deregulation did not improve productivity– that is precisely my point.

  • SB

    MM — that doesn’t answer my initial question. I know Politicraticus probably has no idea, but you’re an economist. What presidential policies, in particular, increase business productivity?

  • SB

    Or is a “living wage” just for heads of households? (But wait, that’s discrimination, the one thing that liberals oppose with all their might.).

    FYI, Poli, what I’m hinting at here is the fact that in historic Catholic social thought — which MM praises from time to time — heads of household really were viewed differently, in a way that would be viewed today as gender discrimination, marital discrimination, etc. Indeed, early in the 20th century, progressives and Catholics tried to discourage women from entering the workplace at all. So on previous occasions, I’ve tried to ask MM whether he supports THAT line of thinking as well.

    Needless to say, he never gives an answer — he obviously likes using Rerum Novarum as a weapon with which to attack America or modern conservatives. But when it comes to other passages (see below), he would have to either 1) praise the sort of gender discrimination that modern liberals hate, or else 2) disagree with it, in which case he’d be admitting that people have a right to make up their own minds.

    * For example: “Women, again, are not suited for certain occupations; a woman is by nature fitted for home-work, and it is that which is best adapted at once to preserve her modesty and to promote the good bringing up of children and the well-being of the family. “

  • SB

    I know he won’t answer; tweaking ideologues is all in good fun. 🙂

  • Morning’s Minion

    “What presidential policies, in particular, increase business productivity?”

    Probably not many. My off-the-cuff answer would be education and R&D.

  • Ralph not Waldo

    This is great news. I think I’ll go into the buggy whip business. I’ll try real hard to sell enough whips to support my living wage here in the LA suburbs, but if I can’t I demand MM make up the difference.

  • SB

    That would be my guess too, although even the effect of education is doubtful (see Alison Wolf’s book). So we’re down to R&D. Now, if you blame Reagan for not increasing productivity, you must have some idea how his R&D policies differed from other Presidents, and you should further be able to point to specific studies identifying his R&D policies as the determinative factor here. Can you do so?

    Still waiting as to whether you really agree with Rerum Novarum, or whether you just like to pull out favored passages with which to beat conservatives over the head. (For that matter, I’m still waiting for you to explain whether you really meant it when you strongly implied that the last 100 years of economic development weren’t worth it, because they cause 0.7 degrees of global warming.)

  • Morning’s Minion

    You’re getting it backwards. I’m not blaming Reagan for not increasing productivity- I’m arguing that his supply-side reforms did not increase productivity at all, which remained at its post-1973 slump. Productivity only increased after 1995, and that can be traced to the IT boom. My point is therefore that these reforms (less progressive taxes, more deregulation, curbing the power of unions) did not boost the productive capacity of the economy, but it did contribute to the ongoing increase in inequality and changing social norms. But people seem to assume otherwise…

    On the RN issue: first, I don’t oppose conservatives, I oppose that strain of American liberal who calls themself conservatve– ideology of free markets, small government in general, big government in the case of the military. To your point: yes, I believe society would be more stable if more women could stay at home with their childen. Unfortunately, that’s simply not on the cards. If you look at trends in real median household income since 1973– it rose by a mere 16 percent. But for men between 35-44, key prime-age earners, it actually fell by 12 percent. So, I think you will see that this is entirely consisttent with the argunments I am making about the great increase in inequality and stagnation– arguments that resonate too in RN, albeit in a different era.

    But we also need to appreciate some subtle developments in Church teaching, especially John Paul’s teachings on nuptuality, which emphasized the equal dignity of male and female, and mutual submission rather than male headship. These teachings (John Paul was heavily influenced by de Lubac and Balthasar and ultimately from Origen) are arguably the most significant theological development in recent years. And note that John Paul, in his letter to women, clearly applauds working women.

  • “ Or is a “living wage” just for heads of households? (But wait, that’s discrimination, the one thing that liberals oppose with all their might.).”

    Who said that? Liberals want comprehensive family health benefits while McCain wants to make each household pay more for the number of children and an outside the labor market spouse. McCain wants the tax system to give cuts to high income single people while the liberals support tax relief for middle and lower income families, particualry large families.

    But on the main issue, the Church teaches labor is not a commody. This is the fundemental non-negotiable principle separating Catholicism with free market conservativism.

  • SB

    Who said that?

    No one here, but American liberals are generally quite opposed to gender discrimination and marital discrimination, such as would occur if a 40-year-old male head of household was paid twice as much as a 18-year-old female for the same job. Have you not noticed this?

  • Blackadder

    “the Church teaches labor is not a commody. This is the fundemental non-negotiable principle separating Catholicism with free market conservativism.”

    Well, labor clearly is a commodity, in the sense that it is something that is bought and sold, and is subject to the same economic laws as anything else that is bought and sold. One could, I suppose, claim that it is immoral to buy or sell one’s labor, but the Church doesn’t say that.

  • Who said that?

    No one here, but American liberals are generally quite opposed to gender discrimination and marital discrimination, such as would occur if a 40-year-old male head of household was paid twice as much as a 18-year-old female for the same job. Have you not noticed this?

    I think one of the great failings of dialogue is the setting up of straw men and knocking them down. You would be better advised to let liberals speak for ourselves. And further, one should not search and seek some oddity and declare it the liberal consensus in order to atack it.

    American liberalism has been quite supportive of provisions to assist those with the duties and obligations of life. Gender based pay systems have been tried and failed — Westinghouse would be the classic example and if you want to revisit this, make your case for the company’s policy and I will respond with my objections.

    But given the shortcomings of the Westinghouse model, liberals supported benefits and tax policies to achieve the goals of recognizing the needs of families from their breadwinner. Therefore you have Social Security survivor benefits, Disability Insurance widows and childrens benefits (bth threatened by Bush’s privitization scheme), family benefits in health insurance in most union negotiated plans, survivors’ benefits in union negotiated private pensions, as well as tax deductions for those dependent on the breadwinner.

    So, rather than “oppose with all of our might” we liberals have been in the forefront of workable means of ‘discriminating’ to the benefit of those heading the household as the breadwinner. And we have found ways more effective at meeting those goals than the clunky classification schemes onced used by Westinghouse.

  • SB

    I’m not defending gender-based pay systems. I was asking MM if he would push for them, given his professed admiration for the early 20th-century progressives who wanted to keep women out of the workplace altogether. But if not, was he suggesting that 16-year-olds living at home should be paid a “living wage”?

    If you don’t recognize that liberals in American normally oppose discrimination on the grounds of gender or marriage, then I’m too floored to come up with a response, other than that you should google “Title VII” and browse through the 900,000 or so results.

  • I’m not defending gender-based pay systems.

    So it is YOU who opposes gender based pay systems. It seems that it is not just liberals but a broader social consensus here. Unless you have joined the Liberal Club and, if so, let me say welcome!!!!

    If you are too floored about this matter, I think it is because you get your information about liberals from Rush rather than from reality.

    When Bush tried to privitize Social Security, it was us liberals who asserted that one of the most anti-social aspects of privitization is the harm it would do for spousal, survivors and dependent childrens benefits under OASI and DI. Explain that as well as the survivor, spousal and dependent children benefits in the better union negotiated health and pension plans and explain liberal support for tax policies that benefit families and dependents (rather than the Republican ‘take care of the super-rich instead of families).

  • Well, gee, it was really fair to quote me as saying “I lack the space here to explain just how destructive and ill-considered living wage proposals are,” without having the decency to point out that I then go on to link people to AN ENTIRE BOOK CHAPTER I wrote on the subject. Then the first commenter, having read only your unfair cherry-picking, is shocked at my supposed impudence.

    That’s just crummy.

  • Failure to include what the author of his own piece made as a parenthetical comment is not cherry picking. For the record, your chapter didn’t address your critics but was propounding your own views, not that there is anything wrong with that.

  • Policraticus

    Agreed. If it were a crucial point, you would have given us at least a brief synopsis of your position rather than a reference. But what is more important than that minor point is the flawed essay itself, which is reckless in its reading of Leo XIII, confused in its assessment of episcopal authority, and ideologically committed to faith contorting to reason. Perhaps you might answer your new critics on this occasion instead of referring us to older work.

  • SB

    Katherine —

    The point I made was very simple. If anyone ever proposed that a father supporting an entire family should be paid more for the same job than unmarried people or than a woman providing a second income to her family, that would be illegal under laws passed and overwhelmingly supported by liberals (and not just liberals either). That’s not a caricature of liberals, and it is frankly stupid to suggest as much. It’s a simple fact that liberals have lobbied for and supported such laws.

    So when anyone says that everyone should be paid a “living wage,” I wonder what they mean — do they mean that a father supporting a family deserves a living wage? (If so, then that would run into problems with the anti-discrimination laws I just mentioned). On the other hand, do they mean that literally everybody — including the 16-year-old living at home with millionaire parents — should be paid a wage high enough to support a family? Well, that view doesn’t seem so intuitively right either.

    Again, this isn’t rocket science. I’m just trying (unsuccessfully, you might note) to get some of the kneejerk ideologues around here to think a bit more deeply about their position, their presuppositions, their goals and methods, etc.