All Commentary
Saturday, September 1, 1956

Labors True Magna Charta

Labor is a commodity whether exchanged directly or indirectly—directly as a service or indirectly as the bag of wheat produced by one’s labor.

Since the beginning of 1933 more than 630 million man-days of work have been lost as a direct result of work stoppages, with no account taken of the secondary idleness caused by the failure of struck industries to deliver their products or perform their services on time and by the decline in the purchasing power of striking workers.

What has labor to show for these losses? A rough idea can be gained from the government’s figures for manufacturing industries. The average hourly earnings of factory workers have more than quadrupled since 1932, but the increase has been offset by the rise in prices of finished goods. The ratio of earnings to prices, which measures the real ability of the worker to buy the product, has risen 76 per cent, while productivity (average output per man-hour) has increased 77 per cent. Thus, despite the sharp rise in money wages, the real gain to the worker has been limited to the increase in productivity, just as it was before the days of industry-wide unions and national-emergency strikes . . . .

This study in futility has come about mainly as a result of the persistent belief that the earnings of labor somehow can and should be exempted from the free-market processes by which prices, values, and distributive shares in general are determined in a competitive economy—a belief that is epitomized in the declaration that “labor is not a commodity.” How did this expression originate, what does it really mean, and what does it imply?

Superficially, the statement that “labor is not a commodity” has a strong humanitarian appeal. It sounds like a sort of declaration of independence for labor, an assertion that the workingman is not a slave or chattel to be bought and sold in the market place. It was undoubtedly this aspect of the matter that led Pope Leo XIII in 1891 to issue his famous encyclical on the condition of labor, Rerum Novarum, a document that has done much to shape recent thinking on labor questions. The official English version contains these words:

“Religion teaches the rich man and the employer that their work people are not their slaves . . . and that it is shameful and inhuman to treat men like chattels to make money by . . . .”

No doubt it was likewise the humanitarian appeal mixed perhaps with other considerations, that led Congress to declare in the Clayton Act of 1914 that “the labor of a human being is not a commodity or article of commerce. Nothing contained in the antitrust laws shall be construed to forbid the existence and operation of labor, agricultural, or horticultural organizations, instituted for the purposes of mutual help, and not having capital stock or conducted for profits, or to forbid or restrain individual members of such organizations from lawfully carrying out the legitimate objects thereof; nor shall such organizations, or the members there, of, be held or construed to be illegal combinations or conspiracies in restraint of trade under the antitrust laws.”

This provision was enthusiastically hailed as a “Magna Charts” of labor. Subsequent court decisions showed that its practical effects were much less important than had been thought, and Congress eventually found it necessary to pass the Norris-La Guardia Act of 1932 in order to give labor unions the legal immunity that was deemed desirable. This, however, is beside the point. The point is that the majority in Congress, like many others, believed (1) that a legislative enactment could exempt labor from the normal competitive determination of its rates of pay, and (2) that labor would gain by such an exemption.

The same philosophy underlies the whole trend of recent governmental labor policy and labor legislation: the National Industrial Recovery Act of 1933, the Wagner Act of 1935, the Fair Labor Standards Act of 1938, the Smith-Connally Act of 1943, the Taft-Hartley Act of 1947, and a multitude of other federal and state laws. Some foreign countries still commonly called “free” have gone even further in regulating or influencing labor-management relations in general and wage rates in particular. Whatever the means may be, the underlying intent is the same: to “emancipate” the worker from the rule of the market, to prove that “labor is not a commodity.”

What Is a Commodity?

The statement that working people are not slaves or chattels and the declaration that their labor is not a commodity or article of commerce sound much alike, and this superficial similarity appears to have caused a great deal of confusion. Actually, not only are they two very different assertions, but in their final implications they are mutually contradictory. This becomes clear when a little consideration is given to the real economic position and significance of human labor.

The essential characteristics of a commodity or article of commerce are (1) that it is in demand and (2) that its supply is not unlimited. These two characteristics give it value, enable it to command a price in the market in exchange for other valuable things. The price is determined by the interaction of demand and supply—demand as affected by the commodity’s price and usefulness, supply as affected by the price obtainable for it and the difficulty or cost of producing it.

Human labor possesses all these characteristics. It is in demand; its supply is limited; hence, it commands a price in the market. The demand for it arises from the fact that employers can use it profitably and is limited by the ability of employers so to use it. The supply arises from the need of workers to meet their personal wants and is limited by the number of workers and their preference for leisure; that is, for non-economic pursuits.

Economists usually make a distinction between commodities and services, commodities being material articles and services consisting of useful actions. The distinction is not essential to the present purpose, because the basic economic characteristics of the two categories are the same. If labor is not a commodity in this sense, it is certainly a service, and from the economic standpoint it is, in every essential respect, a “commodity or article of commerce.”

What does this mean to the individual worker? It means that he is the owner of a valuable commodity, his capacity to work, which other men are eager to buy and pay for. This commodity is inalienably his, and he is free to sell it in the most attractive market he can find. He can pick and choose, not only among pay offers but among occupations. He is, in a larger or smaller way, an independent proprietor, an entrepreneur. His opportunity to rise is limited only by his capacity to make himself useful to others through his ability, energy, and diligence. He is able to command an income from others, not by virtue of any authority or compulsion by a paternalistic state, not because of any protection or favor bestowed upon him by a public or private organization, but because others are ready to buy voluntarily, and in their own interest, what he has to sell. The fact that his labor is a commodity does not make him a slave or a chattel. On the contrary, it makes him, in the full sense of the phrase, a free man.

How Wages Are Determined

To say that employers seek to “make money” by hiring workers is not to say that they are treating them like chattels. The employer does precisely what the worker does: he tries to employ his resources to the best advantage. In this endeavor, each party attempts to “make money” from the other; that is, each hopes and expects to profit by the employment contract, and each tries to make the best bargain he can. Only in this way can an economy of free enterprise function effectively. If it were not for the hope of “making money,” there would be no employment and no enterprise. “Making money” is merely the form which the efficient use of resources takes in an enterprise economy. To read a sinister meaning into the phrase is to betray a lack of understanding of the whole economic process.

It is as pointless to criticize the employer for not paying more than he must as to blame the worker for refusing to work for less than he can get elsewhere. Each party obtains the best terms he can. The worker must work for a wage that will make it profitable for the employer to hire him in turning out a product at a price which consumers are able and willing to pay in a competitive market. The employer must pay a wage that will prevent the worker from being drawn away by other employers. In this way there is established a wage structure, a set of “going rates” for different occupations and grades of labor. These rates reflect the productivity of industry at the time, the quantity of goods and services produced in relation to the quantity of resources employed. If wage rates are not higher than they are, it is not because of the rapacity of employers but because the productivity of industry, while greater than ever before, is still limited.

The idea of a fair, just, or reasonable wage is very appealing. But what is fair, just, and reasonable under the conditions prevailing at a particular time? Since the dawn of history, buyers and sellers have had very different ideas regarding the concrete meaning of these words. How are such differences to be resolved? There is only one valid and objective criterion: the free market, which, under the consumer’s whiplash (and the consumer means everyone), forces both buyers and sellers of labor to conform to the basic reality Of the situation, the current level of productivity . . . .

To abolish the market determination of wages—that is, the commodity character of labor it would be necessary to destroy private enterprise and resort to socialism. Then the worker really would become a chattel. No longer would his wages depend upon his individual ability to make himself useful, as determined ultimately by the current state of industrial productivity, but upon the will of a political master, from whose decision there would be no appeal. No longer would he be free to choose his occupation, or even his place of residence; he would have to work at his assigned task, whatever and wherever it happened to be, at the bidding of the same political master.

The true “Magna Charta” of labor lies in the very fact that labor is “a commodity or article of commerce,” not a pawn in a totalitarian game. []

From The Guaranty Survey, July 1956.

The Employee’s Reserve

It may be interesting to Speculate for a moment as to just how an employee’s reserve compares in dollar value with a reserve fund of capital. For instance, let us consider a young man who might reasonably expect to find regular employment for a period of forty years at an average weekly wage of $100. For a nonworking person to draw a comparable income from a trust fund—assuming that it earns interest at the rate of three per cent and that the principal also is to be used up over the period of forty years—an original capital investment of $120,000 would be required. A person’s capacity for productive work is truly a valuable reserve, equal in worth to the inheritance from quite a “rich uncle.” A young man has quite a stake in maintaining the kind of competitive society in which such reserves are recognized as being private property.

Paul L. Poirot, Bargaining

“History shows by many examples that excessive taxation, the reckless use of the power to destroy, as it has been so aptly called, is an important factor in the decline and fall of civilization.”

  • Paul L. Poirot was a long-time member of the staff of the Foundation for Economic Education and editor of its journal, The Freeman, from 1956 to 1987.