Tuesday, June 06, 2006

Minimum wage

Socialism: Epilogue in paragraph E.19
Minimum wage rates, whether enforced by government decree or by labour union pressure and compulsion, are useless if they fix wage rates at the market level. But if they try to raise wage rates above the level which the unhampered labour market would have determined, they result in permanent unemployment of a great part of the potential labour force.

Government spending cannot create additional jobs. If the government provides the funds required by taxing the citizens or by borrowing from the public, it abolishes on the one hand as many jobs as it creates on the other. If government spending is financed by borrowing from the commercial banks, it means credit expansion and inflation. If in the course of such an inflation the rise in commodity prices exceeds the rise in nominal wage rates, unemployment will drop. But what makes unemployment shrink is precisely the fact that real wage rates are falling.


The inherent tendency of capitalist evolution is to raise real wage rates steadily. This is the effect of the progressive accumulation of capital by means of which technological methods of production are improved. There is no means by which the height of wage rates can be raised for all those eager to earn wages other than through the increase of the per capita quota of capital invested. Whenever the accumulation of additional capital stops, the tendency towards a further increase in real wage rates comes to a standstill. If capital consumption is substituted for an increase in capital available, real wage rates must drop temporarily until the checks on a further increase in capital are removed. Government measures which retard capital accumulation or lead to capital consumption—such as confiscatory taxation—are therefore detrimental to the vital interests of the workers.

Credit expansion can bring about a temporary boom. But such a fictitious prosperity must end in a general depression of trade, a slump.

It can hardly be asserted that the economic history of the last decades has run counter to the pessimistic predictions of the economists. Our age has to face great economic troubles. But this is not a crisis of capitalism. It is the crisis of interventionism, of policies designed to improve capitalism and to substitute a better system for it.

No economist ever dared to assert that interventionism could result in anything else than in disaster and chaos. The advocates of interventionism--foremost among them the Prussian Historical School and the American Institutionalists—were not economists. On the contrary. In order to promote their plans they flatly denied that there is any such thing as economic law. In their opinion governments are free to achieve all they aim at without being restrained by an inexorable regularity in the sequence of economicphenomena Like the German socialist Ferdinand Lassalle, they maintain that the State is God.

The interventionists do not approach the study of economic matters with scientific disinterestedness. Most of them are driven by an envious resentment against those whose incomes are larger than their own. This bias makes it impossible for them to see things as they really are. For them the main thing is not to improve the conditions of the masses, but to harm the entrepreneurs and capitalists even if this policy victimizes the immense majority of the people.

In the eyes of the interventionists the mere existence of profits is objectionable. They speak of profit without dealing with its corollary, loss. They do not comprehend that profit and loss are the instruments by means of which the consumers keep a tight rein on all entrepreneurial activities. It is profit and loss that make the consumers supreme in the direction of business.It is absurd to contrast production for profit and production for use. On the unhampered market a man can earn profits only by supplying the consumers in the best and cheapest way with the goods they want to use. Profit and loss withdraw the material factors of production from the hands of the inefficient and place them in the hands of the more efficient. It is their social function to make a man the more influential in the conduct of business the better he succeeds in producing commodities for which people scramble. The consumers suffer when the laws of the country prevent the most efficient entrepreneurs from expanding the sphere of their activities. What made some enterprises develop into "big business" was precisely their success in filling best the demand of the masses.

Anti-capitalistic policies sabotage the operation of the capitalist system of the market economy. The failure of interventionism does not demonstrate the necessity of adopting socialism. It merely exposes the futility of interventionism. All those evils which the self-styled "progressives" interpret as evidence of the failure of capitalism are the outcome of their allegedly beneficial interference with the market. Only the ignorant, wrongly identifying interventionism and capitalism, believe that the remedy for these evils is socialism.

What these people fail to realize is that the various measures they suggest are not capable of bringing about the beneficial results aimed at. On the contrary they produce a state of affairs which from the point of view of their advocates is worse than the previous state which they were designed to alter. If the government, faced with this failure of its first intervention, is not prepared to undo its interference with the market and to return to a free economy, it must add to its first measure more and more regulations and restrictions. Proceeding step by step on this way it finally reaches a point in which all economic freedom of individuals has disappeared. Then socialism of the German pattern, the Zwangswirtschaft of the Nazis, emerges.
For more information: Part 4, Chapter XIV. The scope and method of catallactics

Bob McEwen former US Congressman from Ohio:
Part 1
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Bob McEwen: Part 2
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