All Commentary
Thursday, February 1, 1962

Sharing the Gains


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.


  • Mr. Fleming, for many years New York Busi­ness Correspondent of the Christian Science Monitor, is a prominent free-lance writer on business and economics.