Mr. Fleming, for many years New York Business Correspondent of the Christian Science Monitor, is a prominent free-lance writer on business and economics.
All economic gains must be eventually shared. That is a basic principle of such broad application that it might be called a general "law of economics."
This is not socialism. It is the essence of the free economy. Nor is it "redistribution." It is plain distribution, or diffusion of wealth.
It works this way:
1. All business is done by agreements of some kind.
2. The agreements are voluntary.
3. Nobody agrees to anything unless he finds it in some way to his advantage.
These add together to make the essential reason why economic well-being is more widely distributed in the United States than it ever has been in any other country.
For in a free economy, everybody gets a share of the values other people have to offer. But they also have to share a part of the values they themselves have to offer.
A million deals, agreements, trades, contracts, and bargains are made every day in this country. They are all voluntary, and go on the same principle as that of the most primitive barter between Indians and fur-traders. Both sides gain, or think they gain.
This is the difference between ours and the communist system—or any army system. (The communists, in fact, seem to feel that a deal is something like matching coins. One man’s gain must be another man’s loss.)
But because of this principle of sharing, or "letting the other fellow make a profit, too," the free economy is one of history’s greatest mechanisms for the diffusion of wealth.
What Pulls up Wages
This principle of sharing applies to all markets, including the market for labor. The workman with labor to sell has been for 150 years the most consistent gainer from this sharing principle. This is because, though labor is a commodity, the price of which is subject to supply and demand, it is a unique commodity. It enters into every kind of production, and as productivity increases, the workman shares in the increase.
The hope of profit in new and growing industries forces employers in those industries to bid up for labor. This force has caused them to bid millions of people from off the farms, from out of depressed areas and out of domestic service, and even from across the Atlantic. The best and the most new jobs are normally found with the most optimistic employers who have the strongest hope of profit. And it is such labor markets that over the decades have steadily lifted wages.
The point where the workman repeatedly benefits from the sharing principle is in the wage-bargain. It is the peculiar nature of this bargain which benefits the workman. What the employer buys is time. But what he sells is units of product (or service). So as fast as he can get more units of product per hour of the time he buys, the time gets more valuable to him, and he can, and eventually will, one way or another, share the gains with the workman—even though the increased productivity may be due in large part to better machinery and management.
The Blessings of Competition
This is because if he doesn’t, then even more successful and ambitious employers will outbid him in the labor market. His rate of "qualified applications" will go down, and his quit-rate will go up. If then he can’t afford to "meet the (rising) market" for workmen’s time, he is on the way to going out of business.
This is the "magic formula of productivity," which class-conscious European economists and employers failed to grasp. It is what Henry Ford meant when he said, "There is no conflict, in a machine economy, between low costs and high wages." This is why the world’s highest-paid labor (per hour of workman’s time) can be and often is the world’s lowest-cost labor (per unit of output); whereas in some parts of Asia and Africa, labor is so expensive, in output or productivity, that it is the lowest-paid in the world, and in some cases scarcely worth any wage at all.
This is also why labor is a unique commodity, the market for which is normally quite different from that of all other commodities. The result of the productivity formula is that, in a free and progressive economy, and particularly in manufacturing industries, the price of an hour of labor normally and indefinitely tends to rise, while the price of manufactured goods normally and indefinitely tends to fall (or tends toward better goods for the same price).
The Costs of Obsolescence
But, it might be asked, "Why doesn’t the employing manufacturer’s net return on sales also keep rising indefinitely?"
Obsolescence and competition are the combined reason. They are the two blades of the shears which keep clipping away the employer’s gains. While the tide of increasing productivity continually works to increase the value of the workman’s time, it continually pushes against the value of the employer’s investment. For example, he builds a new plant, with new machinery, to market a new product. It is a more productive plant, and he pays more for labor, accordingly.
But in time this employer, or a competitor, or a competing industry, builds a still more productive plant, and bids for people to man it. This notches up the labor market. But there is no such market for the outmoded plant. It is on the way to the scrap heap.
Perhaps this story might be criticized as skipping too easily over the problem of technological unemployment. It might be said that workmen can’t move that fast, and labor is not that mobile. But they can move. Their time still has value. An outmoded plant can’t move. It has no more than scrap value. There is no market today for steam locomotives except with the wreckers—nor any market for the shops that built these locomotives. But there is still a market for the time of the men who used to build and drive steam locomotives—though it may have taken them some time to find it.
This article is a brief excerpt from "The American Achievement"—the story of how history and economics and politics and human initiative combined in America to achieve freedom, prosperity, growth, and strength—from the August 1961 issue of Canco Magazine, a publication of the American Can Company.
A copy of the full text of "The American Achievement," in an attractive 6 x 9 booklet, may be obtained for 15 cents from The Freeman, Irvington-on-Hudson, New York.