Chapter 20: "Enough to Buy Back the Product"

It is naught, it is naught, saith the buyer: but when he is gone his way, then he boasteth (Proverbs 20:14).

Once again, Hazlitt returned to the issue of government price fixing. In Chapters 13, 15, 16, 18, and 19, price fixing was in the form of price floors. It is in this chapter, too.

In this variation on the same theme — price floors — Hazlitt invoked a slogan which is rarely heard any longer: “Workers must be able to buy back their product.” It was never widely heard. He said that there were two sources of this slogan: Marxists and labor union leaders. Today, Marxism is dead, and most labor unions are, too. So, we no longer hear the argument.

Hazlitt did not say what the defenders of this idea proposed as a solution. Is the government supposed to raise the wages of workers by decree? All workers? Just some workers? By what percentage? The promoters of this idea never said what they meant. This is one reason why it never caught on.

Hazlitt argued that this argument was a variant of the just price doctrine of the medieval world. Wages had to be just, the theologians said, meaning ethically righteous, meaning fair. But what is fair? The serious theologians of the Middle Ages, including Thomas Aquinas, recognized this problem, and they generally argued that market prices are just, most of the time.

Orthodox Marxist theorists never argued for economic justice. Marx argued that all morality is simply window dressing for class economic interests. The orthodox Marxists did not think that any tinkering with market prices by the state could solve the inherent economic problems of capitalism; only proletarian revolution would. They never talked about how prices would be set in the world beyond the proletarian revolution. Neither did Marx.

This left labor union spokesmen as the promoters of this idea. The best statement of this idea was made by Walter Reuther, the head of the United Auto Workers Union. He also was the head of the Congress of Industrial Organizations (CIO), the more militant of the two major American labor unions, the other being the AFL: American Federation of Labor. Reuther said this years after Hazlitt wrote the book. At a meeting at the Ford Motor Company in 1954, this exchange supposedly took place. It was published in 1955.

CIO President Walter Reuther was being shown through the Ford Motor plant in Cleveland recently.A company official proudly pointed to some new automatically controlled machines and asked Reuther: “How are you going to collect union dues from these guys?”

Reuther replied: “How are you going to get them to buy Fords?”

Reuther cited variants of this exchange in subsequent speeches. The original is close enough for economic analysis. We hear the same arguments today with respect to robotics and computerization. But no one today thinks the problem can be solved by hiking wages by law. The fear today is future massive unemployment at any wage level.

The analytical error of Reuther’s comment comes from this fundamental idea: capitalist employers are exploiting workers by using machines to replace them. We have heard this warning for several centuries.

Machines do not buy anything. Workers buy things. The economic question is this: “Are workers paid the value of their contribution to the production process?” If not, why not? More to the point, if not, how not? In a competitive market, how is it that one employer can exploit workers by not paying them what they are worth? Why don’t rival employers “raid” the exploiter’s operation by offering higher wages?

This takes us back to the issue raised by Hazlitt in so many chapters: “How are prices formed in a free market?” Then there is this follow-up question: “If the state interferes with this price-setting process, what will be the results?”

As always, I begin with the question of ownership, which is a legal issue that has economic ramifications. The reason why I repeat the following two sections is this: the error that Hazlitt was dealing with is the same one as before, namely, a government-mandated price floor.

1. Owners

One set of owners possess money: business owners. They may also possess capital equipment, which includes land and buildings. They possess business plans. These plans involve hiring human laborers.

Another set of owners possess the ability to deliver labor services. These people are eligible to rent out these services.

A third set of owners will decide at some point whether to purchase goods and services that have been produced by a combination of business capital and labor services. They will determine retroactively which sellers prosper and which do not.

All participants possess the legal right to bid.

2. Window

The window is a product of a society’s moral, legal, and cultural traditions and institutions. It is known as the free market. Those with money to spend work out arrangements with people who want to sell goods to buyers, i.e., spenders of money.

In this system, people who hire workers seek to locate people who rent out these services at some price. Economic exchange always depends on an agreed-upon price. Buyers compete against buyers. Sellers compete against sellers. Only in the final stage of the hiring process does face-to-face bargaining take place: would-be employer vs. would-be employee. The prospective employer does not know how little money the prospective employee will accept, and the prospective employee does not know how much money the prospective employer will pay. In this zone of ignorance, there may be negotiating. But probably not. Time is not a free resource. Employers usually make this offer: “Take it or leave it. I am too busy to negotiate.”

The employer acts as an economic agent of future customers. He will give them an opportunity to buy the output of his production process. The employer also acts as an economic agent of his employees. In order to earn money, employees must sell their services to customers. The employees do not know how to market their services directly to customers, but the employer believes that he does. So confident is the employer that he is willing to pay money to the employees to perform certain tasks, irrespective of the near-term decisions of customers. The business pays these employees until the lack of customers makes it evident to the employer that he has misjudged customer demand. Only then will he fire some or all of his employees.

The wage is a signal to other workers and other employers regarding the prevailing conditions of supply and demand. If this wage is a market-clearing wage, there will be no rival workers offering to work for a lower wage for the same job, and there will be no rival employers offering to pay more.

3. Stone

Hazlitt did not describe the stone. He argued that critics also never described it.

How are we to know, however, precisely when labor does have “enough to buy back the product”? Or when it has more than enough? How are we to determine just what the right sum is? As the champions of the doctrine do not seem to have made any clear effort to answer such questions, we are obliged to try to find the answers for ourselves.

He argued that the idea of a lack of purchasing power by workers is a variation of what he called the “purchasing power argument.” Capitalism supposedly withholds from workers the full value of their production. This was Marx’s argument, although Hazlitt did not identify it here: the argument regarding surplus value. Hazlitt zeroed in on the error.

In an exchange economy everybody’s income is somebody else’s cost. Every increase in hourly wages, unless or until compensated by an equal increase in hourly productivity, is an increase in costs of production.

This stone is another variant of every intervention by the state to secure wages that are higher than what are produced by the free market’s system of supply and demand.

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