Why Is the Pay So Lousy?

small-wagesEven if you’re lucky enough to have a job in the Sarbanes-Oxley-Dodd-Frank-Bernanke-Sebelius-Obamacare economy, and even if you’ve beaten the 31-year record and are still part of the 62.8% of American adults who are working even though job creation in October was less than the increase in the adult population (204,000 vs. 213,000), and even if your weekly hours haven’t been cut to 29 or your health plan outlawed because it was, in the words of New Jersey Congressman Frank Pallone, “lousy,” you still might be wondering what happened to your raise.

I have some bad news.  You don’t get paid much more because of how difficult your back-breaking labor is. You don’t get a raise because you’re so much smarter than everyone else in the world. You don’t see an increase in your wealth just because you have an Ivy League degree.

You get paid more because of the quantity and quality of accumulated capital that is invested in your work.

Let’s take a step back for a moment. When we talk about pay, we really mean the stuff – food, clothing, shelter, Newcastle Brown Ale, iPhones, superbowl tickets – that the wages that you receive can buy.  It is futile to earn more money if the value of the money is collapsing due to inflation (that is, the price of everything is going up faster than your wages), or less stuff is being produced, leading to higher prices for everything that is still being produced. You could earn a billion deutschmarks an hour, but if that amount of money will only buy a single egg, as it did at one point during the hyperinflation of Weimar Germany in 1923, then you’re not rich. If, on the other hand, entrepreneurial capitalism, with its division of labor, improvements in technology and automation and visionary leadership, is having the result that less labor is required in almost every industry to produce stuff than what was required before, then prices of stuff that wage earners buy will fall relative to the wages they receive.  At the end of the day, it’s not rising wages that counts so much as the falling prices of the stuff people buy with their wages.

If you take almost any professional, whether a plumber, a gardener, a computer programmer or a doctor, and transplant him or her from an advanced country like the United States to work in a second-tier or Third-World country, that professional will earn less than – perhaps only a fraction of – the pay he or she earned in the First World. In some cases, the relative loss of income may be offset by some elements of a lower cost of living, but that effect is limited; ultimately the material quality of life will be much lower.

Why is that?  The professional is just as smart in Mexico or Rwanda as (s)he was in Germany or Singapore. But (s)he has less capital to work with. Just as a worker with a bulldozer is more productive than a worker with a shovel, all professionals depend on a developed infrastructure, state-of-the-art machinery, computers, technological instruments, information and transportation systems, communications networks and more to get their work done in the most productive way. Every worker in the First World sits on top of a gold mine of capital accumulated from prior generations, which he or she had no hand in building, to make his or her work that much more productive and valuable.

The capital that undergirds the economy takes many forms, from the obvious and tangible assets of land, factories and machines, to the less-obvious and intangible ones of management methodologies, technological processes and know-how, advanced and uncorrupted legal systems and private property rights.

Those last two are the make-or-break elements of a prosperous economy. Because if private property is not respected and defended, and/or if contracts are not enforced, and/or if the justice, tax and/or regulatory systems are corrupt, capricious and arbitrary, then the formation and deployment of capital will be retarded or destroyed no matter how many physical and intellectual resources are available. If you don’t believe this American on this point, ask the Peruvian economist Hernando de Soto, author of “The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else,” who documented all of the “dead” capital that exists in the Third World, due to the lack of a system of recognition of ownership, in order to unleash its power to create wealth for all.

This point cannot be stressed enough: Physical assets like coal, oil, gas, timber, minerals etc. are worthless without a system of private property and prices in which unarmed, unprivileged and unpersecuted non-government entrepreneurs, large- and small-scale, may operate.  The world is full of resource-rich countries, from Mexico to Nigeria and from Venezuela to Russia, which pathetically under-perform other nations like Japan, Switzerland and Singapore, which have no such endowments but which have well-developed legal systems of private property recognition and contract enforcement.  Russia, with its 13 time zones and vast natural resources, has a per-capital standard of living that ranks roughly 50th in the world.

So if you are not seeing an improvement in the purchasing power of your wages or the material standard of living over time, and the same thing is happening to millions of people just like you (a.k.a. your cohort), and there isn’t a major war on, chances are that intangible capital is faltering. And that in turn is probably due to attitudes and policies promulgated by politicians complaining that the “rich” aren’t paying their fair share of taxes, closing off natural resources to development, and slapping so much regulation on businesses that they spend ever more time and energy on compliance instead of innovation, effectively working for the government instead of for their customers. That has been the trend in the United States since 2001 with Sarbanes-Oxley, accelerating since 2009 with Dodd-Frank and the Pelosi-Reid regulatory apparatus.  Obamacare, with its effective abolition of voluntary cooperation between employers, employees, patients, doctors and insurance companies, is the single most destructive factor in this picture today.

High and rising wages depend on the quantity and quality of liberated capital invested in the labor. Whether you are a banker or a tree surgeon (and when I say banker I mean it in the traditional sense of a trusted conservative steward of customers’ money as opposed to a politically-connected financial manipulator), the respect and defense of capital and private property matters to you, and you need to participate actively in the civic society for the furtherance of that respect and defense.

Howard Hyde is author of “Pull the Plug on Obamacare,” available in Kindle and paperback editions from Amazon.com. He edits the website www.hhcapitalism.com. Email: HHCapitalism@gmail.com. Follow on Twitter: @HowardHyde.

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  • Sheik Yerbouti

    Massive hoarding of money always seems to get us to this point. We never seem to learn.

    • philbest

      There is a difference between the amassing of wealth by way of zero-sum rentier activity, which is a plague now, and the accumulation of productive capital that the above article is about.

      One of our major problems now is that zero-sum rentier get-rich-quick schemes are sucking money away from productive investments in productive capital. This only makes the above author’s point more valid. There is usually a government “enabler” role to be found somewhere.

      Frederick C. Howe, in “Confessions of a Monopolist” (1906) says that first, politics is a necessary part of business. To control industries it is necessary to control Congress and the regulators and thus make society go to work for you, the monopolist. So, according to Howe, the two principles of a successful monopolist are, “First, let Society work for you; and second, make a business of politics. These….. wrote Howe, are “the basic rules of big business.”

      These rules have superseded the teachings of our parents and are reducible to a simple maxim: Get a monopoly; let Society work for you:
      and remember that the best of all business is politics, for a legislative
      grant, franchise, subsidy or tax exemption is worth more than a Kimberly or Comstock lode, since it does not require any labor, either mental or physical, for its exploitation.

      This is our problem, and as Henry George pointed out 100 years ago, it is a tragedy that the political representatives of “labor” constantly war against the employer class while the rentiers in finance and property laugh all the way to the bank. It is often the more left-wing mainstream political party under which the rentiers are most successful in the economy.

  • A Z

    “Every worker in the First World sits on top of a gold mine of capital accumulated from prior generations, which he or she had no hand in building, to make his or her work that much more productive and valuable.”

    I just can imagine Elizabeth Warren saying “You didn’t build that”

    Which is true. But if it is pass down through your family from father to son (or mother to daughter; you get the picture), then it is yours.

    If someone give you something, it should not be of any concern of anyone else.
    All that matters is that they engaged in fair trade to build their wealth.

    Progressives refuse to wrap their mind around that fact.

  • A Z

    Oh yeah, Elizabeth Warren was that get rich quick house flipper that got rich on other people’s misfortune.

  • Eugene Patrick Devany

    GDP has been undervalued by about 3% due to the combined productivity – monopoly effect of intellectual property rights. Intellectual property rights enable corporations to increase sales while reducing payroll because competition is locked out. This means fewer jobs and lower wages for Americans. These valuable rights are gifts from the government that determines what can be protected and enforced. The owners rather than the workers have gotten all the benefit. The job killing payroll taxes need to be replaced to rebalance the economy.

    An “optional” 2% tax on average net wealth (excluding $15,000 cash and $500,000 retirement funds) could be paired with a flat 8% income tax (and no payroll taxes) for about 95% of the population. In the alternative, a higher 26% individual income tax rate (plus deferred capital taxes on gains, gifts and estates and no wealth tax) could be paid by anyone (but they would likely be very, very rich). A 4% VAT on business would enable a reduction of the C corporation rate to 8% and elimination of payroll taxes (so combined business tax revenue and consumer prices remain about the same).

    The payroll earnings tax base has been shrinking compared to both net wealth and sales tax bases. Tax base growth can provide funds to pay down the debt without raising the low 2-4-8 rates.