Americanly Yours

You might wonder exactly why it is that janitors earn much less money than CEO’s. After all, in most circumstances, janitors engage in much more physical labor than do CEO’s, executives and managers, and even the average “white collar” worker.

Are the working class laborers being systematically exploited by managers and white collar workers? Is it the case that white collar workers are making money at the expense of blue collar workers, or is there a better explanation?

 

Value Does Not Come From Labor

If labor created value, then society (and all of its members) could get rich by having everyone use their bare hands to dig large holes in the desert and then fill them back up. After all, this would be extremely hard work of a very physical nature. However, this would create no wealth for society—in fact, it would represent a destruction of wealth (imagine what the laborers could have actually produced if they were not hired to complete this task).  Generally, this destruction of wealth takes place in the form of an absence of economic activity which would have otherwise occurred.

The value of a product does not come solely from the labor of the workers. The value of a product is measured subjectively; a product is essentially worth what people are willing to pay for it.

A laborer in turn receives payment for his services based on the value that his work adds to the product or service. A janitor in a shoe factory adds relatively little value to the shoes that are being created. There is likely more value being added by the designer who designs the shoes, by the worker who sews the shoes together, and by the person who manages the distribution network which allows for the shoes to be sold in thousands of stores around the world. These workers add more value to the product, despite the fact that the janitor undoubtedly exerts more physical effort to do his job.

Scarcity

While value added by workers is an important reason for the existence of disparities in income, scarcity tells much more of the story.

As Thomas Sowell put it, economics is the allocation of scarce resources which have alternative uses. With the exception of air, just about all resources are scarce. Similarly, nearly all resources have alternative uses (should this rubber be used to make tires or shoes?, should this glass be used to make a window or a beer bottle?, should my time be spent watching a movie or cleaning the house?).

Scarcity doesnt just mean that there isnt a lot of a certain good. Scarcity means that the good is limited. Even in America, bread is a scarce resource.

Diamonds and Water

Think of diamonds and water. Which of the two resources is absolutely essential to life, and which could we live without? Water is infinitely important: without water we will all die very quickly. Diamonds are nice and sparkly and women love them, but they are hardly essential to our lives. However, water is very cheap and diamonds are very expensive. This phenomenon is known as the “diamond/water” paradox. The reason for the differences in the costs of these goods is scarcity; water is abundant, while diamonds are scarce.

For example, I live in unincorporated DeKalb County [in Georgia] where my water is provided by a government monopoly (and hence is likely more expensive than would be the case under a free market system). Yet, the monthly bill for my 3 bedroom house has averaged $61.17 per month since April of 2007. In other words, over the past 4 years, it has cost about two dollars per day to provide the 2-3 people living in my house at various times with the most important resource that we need for survival. In fact, water is so cheap that I can do more than just use it for survival needs—I use it for showering, cooking, watering my plants, and even brewing beer.

What does this have to do with janitors and CEO’s?

Well, the same principles which lead to the diamond/water paradox also apply to compensation for labor. Please keep in mind that my intent is not to belittle the work that janitors do. I know that this type of work is physically demanding and dirty work. However, there is little skill involved and little intelligence required. The fact of the matter is that nearly every able-bodied person above the age of 13 or so is probably qualified to be a janitor. In contrast, there are only a very limited number of people who have the intelligence, experience, and ability necessary to be a successful CEO of Coca-Cola. Janitors are replaceable and easily trained. High-level executives are not. In other words, the pool of available janitors is relatively unscarce when compared to the pool of available CEO’s of Fortune 100 companies.

Bringing it all together

Disparities in income are hardly the result of exploitation by the white collar class against blue collar workers or the working poor. Compensation results from several factors including the value added by the worker, as well as the relative scarcity of the pool of workers available to fill that position.

There is no Federally mandated wage scale requiring certain salaries for certain types of workers. Decisions on how to pay employees—be they janitors, CEO’s, or something in between—are generally made on a company by company basis. Those in the position to hire janitors will pay them according to the value that they believe will be added to the firm. They will likely tend to pay the janitor at levels similar to that of other janitors in related fields. This is because a janitor is likely to add similar levels of value at which ever company he works. The range of compensation for CEO’s is very large, with CEO’s of smaller companies earning drastically less than do CEO’s at large multi-national firms. This is because of the differences in the amount of value that can be added by different CEO’s in different fields at different companies. The CEO of Wal-Mart is responsible for running a worldwide distribution network, ensuring that over a million employees get paid, and in a broader sense—ensuring that society is fed and clothed. In contrast, the CEO of a small but delicious pizza chain has responsibilities which are much greater than his employees, but which do not compare to that of the CEO of Wal-Mart.

Ceteris Peribus

This article does not deal with things like corporate welfare or other special privileges which are often received by corporations from the State. While special privileges will likely skew the distribution of income away from the bottom of the and towards the top, the principles at hand do not change. In a truly free society with no governmental grants of limited liability, no business licensing requirements, corporate welfare, and private control of the currency, income is likely to be somewhat more evenly distributed among the productive members of society. However, as long as there is any level of freedom of choice, there will always be disparities in income.  Income disparities are not always bad–in fact, they are very important.  Differences in income give us something to strive for.  If we all earned the same wages, no matter how hard we worked, no matter how much value we added to society, and no matter what type of work we did, no matter our ages, or no matter how much experience we had, there would be little reason for people to put much effort into their jobs.  There would be little incentive for anyone to be productive beyond the subsistence level–after all, any additional effort that they did would have to be shared equally with all of society.  If we were all the exact same, there would be no reason for trade, or even for society to exist.  It is our differences which encourage people to interact and trade with each other.  No society larger than a small tribe could survive for long if wages were distributed equally.

As long as there are people with different skills, levels of intelligence, backgrounds, lifestyles, and so on, there will be differences in income. People are different from each other, and as such, will seek out different goods and services. They will also find themselves qualified for different types of employment than their friends and neighbors. Typically, those who are employed in positions that create a lot of value and are relatively scarce will earn higher incomes than those who are employed in positions that create little value and are relatively common.

Americanly Yours,

Phred Barnet

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I have finished reading Ludwig von Mises’ Liberalism. This book was a great book about the importance and significance of the free market and free market (or liberal) values. While reading this book, it is so easy to forget that this book wasnt written last year, but was written in 1927. His writings in this book were prophetic–at one point, he condemns Adolf Hitler. He writes in a very detailed and intellectual way which can be somewhat difficult to read, but if you can handle that, I highly recommend this book.

I have also finished reading Karl Marx’s Wage Labour and Capital. This book was awful. Im not just saying this because I dont agree with Karl Marx’s economic statements. This book was poorly written and contained nothing but assertions with no justifications or proofs. Karl Marx even admits that capitalism leads to an increase in the standard of living of the workers, as well as that of the capitalists. His complaint is that even if the worker is able to buy a large house, the capitalist is buying a larger house–a childish complaint. His notions of where wages come from are so wrong that anyone with a high school diploma would likely immediately see the failed logic in his statements. He sets up an equation involving the workers and the capitalists, but almost completely ignores one half of his equation. This book is complete and utter garbage.

His arguments are so bad that they arent worth refuting, nor is this book worth reading.

I have started re-reading Aristotle’s Politics. This book is a great window into the mind of an ancient philosopher’s views on politics and political systems. He has some great information about the different types of systems of government and their shortfallings.

I have also started reading Gibbon’s the Decline and Fall of the Roman Empire. Classic history of the great empire. Enough said.

Americanly Yours,

Phred Barnet

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I have written about Dr. Thomas Sowell here before.  I think he is possibly the smartest man in the country.  I scoured the interweb and found a bunch of great quotes from him.  Enjoy.

“People who talk incessantly about “change” are often dogmatically set in their ways.  They want to change other people.”

“Much of the social history of the Western world over the past three decades has involved replacing what worked with what sounded good.  In area after area – crime, education, housing, race relations – the situation has gotten worse after the bright new theories were put into operation.  The amazing thing is that this history of failure and disaster has neither discouraged the social engineers nor discredited them.”

“One of the sad signs of our times is that we have demonized those who produce, subsidized those who refuse to produce, and canonized those who complain.”

“The next time some academics tell you how important ‘diversity’ is, ask how many Republicans there are in their sociology department.”

“The first lesson of economics is scarcity: there is never enough of anything to fully satisfy all those who want it.  The first lesson of politics is to disregard the first lesson of economics.”

“Prices are important not because money is considered paramount but because prices are a fast and effective conveyor of information through a vast society in which fragmented knowledge must be coordinated.”

“A recently reprinted memoir by Frederick Douglass has footnotes explaining what words like ‘arraigned,’ ‘curried’ and ‘exculpate’ meant, and explaining who Job was.   In other words, this man who was born a slave and never went to school educated himself to the point where his words now have to be explained to today’s expensively under-educated generation.”

“No matter how disastrously some policy has turned out, anyone who criticizes it can expect to hear: “But what would you replace it with?”  When you put out a fire, what do you replace it with?”

“Capitalism knows only one color: that color is green; all else is necessarily subservient to it, hence, race, gender and ethnicity cannot be considered within it.“

“Each new generation born is in effect an invasion of civilization by little barbarians, who must be civilized before it is too late.”

“If you are not prepared to use force to defend civilization, then be prepared to accept barbarism.”

“If you have always believed that everyone should play by the same rules and be judged by the same standards, that would have gotten you labeled a radical 60 years ago, a liberal 30 years ago and a racist today.”

“It is amazing that people who think we cannot afford to pay for doctors, hospitals, and medication somehow think that we can afford to pay for doctors, hospitals, medication and a government bureaucracy to administer it.”

“Liberals seem to assume that, if you don’t believe in their particular political solutions, then you don’t really care about the people that they claim to want to help.”

“Mistakes can be corrected by those who pay attention to facts but dogmatism will not be corrected by those who are wedded to a vision.”

“Mystical references to society and its programs to help may warm the hearts of the gullible but what it really means is putting more power in the hands of bureaucrats.”

“Prices are important not because money is considered paramount but because prices are a fast and effective conveyor of information through a vast society in which fragmented knowledge must be coordinated.”

“Socialism in general has a record of failure so blatant that only an intellectual could ignore or evade it.”

“Tariffs that save jobs in the steel industry mean higher steel prices, which in turn means fewer sales of American steel products around the world and losses of far more jobs than are saved.”

“The most basic question is not what is best, but who shall decide what is best.”

“The most fundamental fact about the ideas of the political left is that they do not work.   Therefore we should not be surprised to find the left concentrated in institutions where ideas do not have to work in order to survive.”

“The real goal should be reduced government spending, rather than balanced budgets achieved by ever rising tax rates to cover ever rising spending.”

“Too much of what is called “education” is little more than an expensive isolation from reality.”

“What ‘multiculturalism’ boils down to is that you can praise any culture in the world except Western culture – and you cannot blame any culture in the world except Western culture.”

“Would you bet your paycheck on a weather forecast for tomorrow?  If not, then why should this country bet billions on global warming predictions that have even less foundation?”

“The assumption that spending more of the taxpayer’s money will make things better has survived all kinds of evidence that it has made things worse.   The black family- which survived slavery, discrimination, poverty, wars and depressions- began to come apart as the federal government moved in with its well-financed programs to “help.””

“Most people who read “The Communist Manifesto” probably have no idea that it was written by a couple of young men who had never worked a day in their lives, and who nevertheless spoke boldly in the name of “the workers”.”

“Despite a voluminous and often fervent literature on “income distribution,” the cold fact is that most income is not distributed: It is earned.”

“It is hard to imagine a more stupid or more dangerous way of making decisions than by putting those decisions in the hands of people who pay no price for being wrong.” [bureaucrats]

What is ominous is the ease with which some people go from saying that they don’t like something to saying that the government should forbid it.  When you go down that road, don’t expect freedom to survive very long.

Americanly Yours,

Phred Barnet

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