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Dr. Mises is Visiting Professor of Economics at New York University. This article is reprinted by permission from Christian Economics, March 4, 1958.

Our economic system — the market economy or capitalism — is a system of consumers’ supremacy. The customer is sover­eign; he is, says a popular slogan, "always right." Businessmen are under the necessity of turning out what the consumers ask for and they must sell their wares at prices which the consumers can af­ford and are prepared to pay. A business operation is a manifest failure if the proceeds from the sales do not reimburse the busi­nessman for all he has expended in producing the article. Thus the consumers in buying at a definite price determine also the height of the wages that are paid to all those engaged in the industries.

It follows that an employer can­not pay more to an employee than the equivalent of the value the latter’s work, according to the judgment of the buying public, adds to the merchandise. (This is the reason why the movie star gets much more than the charwoman.) If he were to pay more, he would not recover his outlays from the purchasers; he would suffer losses and would finally go bankrupt. In paying wages, the employer acts as a mandatory of the consumers, as it were. It is upon the consumers that the incidence of the wage payments falls. As the im­mense majority of the goods pro­duced are bought and consumed by people who are themselves receiv­ing wages and salaries, it is obvious that in spending their earnings the wage earners and employees themselves are foremost in deter­mining the height of the compen­sation they and those like them will get.

The buyers do not pay for the toil and trouble the worker took nor for the length of time he spent in working. They pay for the prod­ucts. The better the tools are which the worker uses in his job, the more he can perform in an hour, the higher is, consequently, his remuneration. What makes wages rise and renders the mate­rial conditions of the wage earners more satisfactory is improvement in the technological equipment.

American wages are higher than wages in other countries because the capital invested per head of the worker is greater and the plants are thereby in the position to use the most efficient tools and machines. What is called the Amer­ican way of life is the result of the fact that the United States has put fewer obstacles in the way of saving and capital accumulation than other nations.

The economic backwardness of such countries as India consists precisely in the fact that their policies hinder both the accumula­tion of domestic capital and the investment of foreign capital. As the capital required is lacking, the Indian enterprises are prevented from employing sufficient quan­tities of modern equipment, are therefore producing much less per man-hour, and can only afford to pay wage rates which, compared with American wage rates, appear as shockingly low.

There is only one way that leads to an improvement of the stand­ard of living for the wage-earning masses— the increase in the amount of capital invested. All other methods, however popular they may be, are not only futile, but are actually detrimental to the well-being of those they allegedly want to benefit.

What Makes Wages Rise?

The fundamental question is: Is it possible to raise wage rates for all those eager to find jobs above the height they would have attained on an unhampered labor market?

Public opinion believes that the improvement in the conditions of the wage earners is an achieve­ment of the unions and of various legislative measures. It gives to unionism and to legislation credit for the rise in wage rates, the shortening of hours of work, the disappearance of child labor, and many other changes. The preva­lence of this belief made unionism popular and is responsible for the trend in labor legislation of the last decades. As people think that they owe to unionism their high standard of living, they condone violence, coercion, and intimida­tion on the part of unionized labor and are indifferent to the curtail­ment of personal freedom inherent in the union-shop and closed-shop clauses. As long as these fallacies prevail upon the minds of the voters, it is vain to expect a reso­lute departure from the policies that are mistakenly called pro­gressive.

Yet this popular doctrine mis­construes every aspect of economic reality. The height of wage rates at which all those eager to get jobs can be employed depends on the marginal productivity of labor. The more capital — other things being equal — is invested, the higher wages climb on the free labor market, i. e., on the labor market not manipulated by the government and the unions. At these market wage rates all those eager to employ workers can hire as many as they want. At these market wage rates all those who want to be employed can get a job. There prevails on a free labor mar­ket a tendency toward full employ­ment. In fact, the policy of letting the free market determine the height of wage rates is the only reasonable and successful full-em­ployment policy. If wage rates, either by union pressure and com­pulsion or by government decree, are raised above this height, last­ing unemployment of a part of the potential labor force develops.

These opinions are passionately rejected by the union bosses and their followers among politicians and the self-styled intellectuals. The panacea they recommend to fight unemployment is credit ex­pansion and inflation, euphemis­tically called "an easy money policy."

Credit No Substitute for Capital

As has been pointed out above, an addition to the available stock of capital previously accumulated makes a further improvement of the industries’ technological equip­ment possible, thus raises the mar­ginal productivity of labor and consequently also wage rates. But credit expansion, whether it is ef­fected by issuing additional bank­notes or by granting additional credits on bank accounts subject to check, does not add anything to the nation’s wealth of capital goods. It merely creates the illusion of an increase in the amount of funds available for an expan­sion of production. Because they can obtain cheaper credit, people erroneously believe that the coun­try’s wealth has thereby been in­creased and that therefore certain projects that could not be executed before are now feasible. The in­auguration of these projects en­hances the demand for labor and for raw materials and makes wage rates and commodity prices rise. An artificial boom is kindled.

Under the conditions of this boom, nominal wage rates which before the credit expansion were too high for the state of the mar­ket and therefore created unemployment of a part of the potential labor force are no longer too high and the unemployed can get jobs again. However, this happens only because under the changed mone­tary and credit conditions prices are rising or, what is the same expressed in other words, the purchas­ing power of the monetary unit drops. Then the same amount of nominal wages — wage rates ex­pressed in terms of money — means less in real wages — in terms of com­modities that can be bought by the monetary unit. Inflation can cure unemployment only by curtailing the wage earner’s real wages. But then the unions ask for a new in­crease in wages in order to keep pace with the rising cost of living and we are back where we were before, in a situation in which large scale unemployment can only be prevented by a further expan­sion of credit.

Protracted Inflation

This is what happened in this country as well as in many other countries in the last years. The unions, supported by the govern­ment, forced the enterprises to agree to wage rates that went be­yond the potential market rates, that is, the rates which the public was prepared to refund to the em­ployers in purchasing their prod­ucts. This would have inevitably resulted in rising unemployment figures. But the government poli­cies tried to prevent the emergence of serious unemployment by credit expansion — inflation. The out­come was rising prices, renewed demands for higher wages and reiterated credit expansion; in short, protracted inflation.

But finally the authorities became frightened. They know that inflation cannot go on endlessly. If one does not stop in time, the pernicious policy of increasing the quantity of money and fiduciary media, the nation’s currency sys­tem collapses entirely. The mone­tary unit’s purchasing power sinks to a point which for all practical purposes is not better than zero. This happened again and again, in this country with the Conti­nental Currency in 1781, in France in 1796, in Germany in 1923. It is never too early for a nation to realize that inflation cannot be considered as a way of life and that it is imperative to return to sound monetary policies. In recog­nition of these facts the Admin­istration and the Federal Reserve Authorities some time ago discontinued the policy of progressing credit expansion.

Sound Money Doesn’t Cause Slump

It is not the task of this article to deal with all the consequences which the termination of infla­tionary measures brings about. We have only to establish the fact that the return to monetary stability does not generate a crisis. It only brings to light the malinvestments and other mistakes that were made under the hallucination of the il­lusory prosperity created by the easy money. People become aware of the faults committed and, no longer blinded by the phantom of cheap credit, begin to readjust their activities to the real state of the supply of material factors of production. It is this — certainly painful, but unavoidable — read­justment that constitutes the depression.

One of the unpleasant features of this process of discarding chimeras and returning to a sober estimate of reality concerns the height of wage rates. Under the impact of the progressing inflationary policy the union bureaucracy acquired the habit of asking at regular in­tervals for wage raises, and busi­ness, after some sham resistance, yielded. As a result these rates were at the moment too high for the state of the market and would have brought about a conspicuous amount of unemployment. But the ceaselessly progressing inflation very soon caught up with them. Then the unions asked again for new raises and so on.

The Purchasing Power Argument

It does not matter what kind of justification the unions and their henchmen advance in favor of their claims. The unavoidable effects of forcing the employers to remunerate work done at higher rates than those the consumers are willing to restore to them in buying the products are always the same: rising unemployment figures.

At the present juncture the unions try to rake up the old hundred-times-refuted purchasing power fable. They declare that putting more money into the hands of the wage earners — by raising wage rates, increasing the benefits to the unemployed, and embark­ing upon new public works — would enable the workers to spend more and thereby stimulate business and lead the economy out of the recession into prosperity. This is the spurious pro-inflation argu­ment to make all people happy through printing paper bills.

Of course, if the quantity of the circulating media is increased, those into whose pockets the new fictitious wealth comes —whether they are workers or farmers or any other kind of people — will in­crease their spending. But it is precisely this increase in spending that inevitably brings about a gen­eral tendency of all prices to rise. Thus the help that an inflationary action could give to the wage earners is only of a short duration. To perpetuate it, one would have to resort again and again to new inflationary measures. It is clear that this leads to disaster.

There is a lot of nonsense said about these things. Some people assert that wage raises are "in­flationary." But they are not in themselves inflationary. Nothing is inflationary except inflation, i. e., an increase in the quantity of money in circulation and credit subject to check (checkbook money). And under present conditions nobody but the govern­ment can bring an inflation into being. What the unions can gener­ate by forcing the employers to accept wage rates higher than the potential market rates is not in­flation and not higher commodity prices, but unemployment of a part of the people anxious to get a job. Inflation is a policy to which the government resorts in order to prevent the large scale unemploy­ment the unions’ wage raising would otherwise bring about.

Political Dilemma

The dilemma which this country and many others have to face is very serious. The extremely popu­lar method of raising wage rates above the height the unhampered labor market would have estab­lished would produce catastrophic mass unemployment if inflationary credit expansion were not to res­cue it. But inflation has not only very pernicious social effects. It cannot go on endlessly without re­sulting in the complete break­down of the whole monetary system.

Public opinion, entirely under the sway of the fallacious labor union doctrines, sympathizes more or less with the union bosses’ de­mand for a considerable rise in wage rates. As conditions are to­day, the unions have the power to make the employers submit to their dictates. They can call strikes and, without being restrained by the authorities, re­sort with impunity to violence against those willing to work. They are aware of the fact that the enhancement of wage rates will increase the number of job­less. The only remedy they suggest is more ample funds for unemploy­ment compensation and a more ample supply of credit, i. e., in­flation. The government, meekly yielding to a misguided public opinion and worried about the outcome of the impending elec­tion campaign, has unfortunately already begun to reverse its at­tempts to return to a sound mone­tary policy. Thus we are again committed to the pernicious methods of meddling with the supply of money. We are going on with the inflation that with accelerated speed makes the purchasing power of the dollar shrink. Where will it end? This is the question which Mr. Reuther and all the rest never ask.

Only stupendous ignorance can call the policies adopted by the self-styled progressives "pro-labor" policies. The wage earner like every other citizen is firmly interested in the preservation of the dollar’s purchasing power. If, thanks to his union, his weekly earnings are raised above the mar­ket rate, he must very soon discover that the upward movement in prices not only deprives him of the advantages he expected, but besides makes the value of his savings, of his insurance policy, and of his pension rights dwindle, And, still worse, he may lose his job and will not find another.

Against Inflation, But…

All political parties and pres­sure groups protest that they are opposed to inflation. But what they really mean is that they do not like the unavoidable conse­quences of inflation, namely, the rise in living costs. Actually they favor all policies that necessarily bring about an increase in the quantity of the circulating media. They ask not only for an easy money policy to make the unions’ endless wage boosting possible but also for more government spend­ing and — at the same time — for tax abatement through raising the exemptions.

Duped by the spurious Marxian concept of irreconcilable conflicts between the interests of the social classes, people assume that the in­terests of the propertied classes alone are opposed to the unions’ demand for higher wage rates. In fact, the wage earners are no less interested than any other groups or classes in a return to sound money. A lot has been said in the last months about the harm fraud­ulent officers have inflicted upon the union membership. But the havoc done to the workers by the union’s excessive wage boosting is much more detrimental.

It would be an exaggeration to contend that the tactics of the unions are the sole threat to mone­tary stability and to a reasonable economic policy. Organized wage earners are not the only pressure group whose claims menace today the stability of our monetary sys­tem. But they are the most power­ful and most influential of these groups and the primary responsi­bility rests with them.

The Need for Monetary Stability

Capitalism has improved the standard of living of the wage earners to an unprecedented ex­tent. The average American fam­ily enjoys today amenities of which, only a hundred years ago, not even the richest nabobs dreamed. All this well-being is conditioned by the increase in savings and capital accumulated; without these funds that enable business to make practical use of scientific and technological prog­ress the American worker would not produce more and better things per hour of work than the Asiatic coolies, would not earn more, and would, like them, wretchedly live on the verge of starvation. All measures which — like our income and corporation tax system — aim at preventing further capital ac­cumulation or even at capital decumulation are therefore virtually antilabor and antisocial.

One further observation must still be made about this matter of saving and capital formation. The improvement of well-being brought about by capitalism made it possible for the common man to save and thus to become a capitalist himself in a modest way. A considerable part of the capital work­ing in American business is the counterpart of the savings of the masses. Millions of wage earners own saving deposits, bonds, and insurance policies. All these claims are payable in dollars and their worth depends on the soundness of the nation’s money. To preserve the dollar’s purchasing power is also from this point of view of vital interest to the masses. In order to attain this end, it is not enough to print upon the banknotes the noble maxim, In God we trust. One must adopt an appropriate policy.




Ideas On Liberty
Unlimited Power

If congress can apply money indefinitely to the general welfare and are the sole and supreme judges of the general welfare, they may take the care of religion into their hands; they may estab­lish teachers in every state, county and parish, and pay them out of the public treasury; they may take into their hands the education of children, establishing in like manner schools throughout the Union; they may undertake the regulation of all roads other than post roads. In short, everything from the high­est object of state legislation down to the most minute objects of police, would be thrown under the power of Congress. For every object I have mentioned would admit the application of money, and might be called, if Congress pleased, provisions for the General Welfare.

Hugh Williamson of N. Carolina, Member of the Constitutional Convention, 1787

Ludwig von Mises
Ludwig von Mises

Ludwig von Mises (1881-1973) taught in Vienna and New York and served as a closes adviser to the Foundation for Economic Education. He is considered the leading theorist of the Austrian School of the 20th century.