All Commentary
Monday, November 1, 1965

Who Fixes Wages?

Dr. Sennholz heads the Department of Eco­nomics at Grove City College, Pennsylvania.

One of the fundamental pillars of the individual enterprise system is market pricing. Without it, there can be no economic freedom, no free economy, no enterprise system called capitalism. With it, there can be no comprehensive economic regimentation called so­cialism.

Some prices directly relate to the economic actions of compara­tively few buyers and sellers. Others, however, are of utmost importance for nearly all individ­uals. This is true especially of the prices of human labor, commonly called wages, salaries, professional fees, and honoraria. From the point of view of the buyer, they are called “labor costs.”

The socialists profess moral an­guish and disgust about this prop­osition that applies the economics of price to human labor. “How heartless and merciless,” they proclaim, “to apply economic calcula­tion and cost consideration to la­bor exertions that encompass a person’s moral, intellectual, and physical efforts, in fact, his whole person!”

It is true that when I sell my own labor, all these considerations influence my mode of action. I wish that all the buyers of my labor would, for once, disregard their own calculations of useful­ness and cost, and attach an ex­ceptionally high value to my serv­ices. I could then revel in leisure and luxury and, in turn, pay no at­tention to other people’s labor costs.

But in our world of reality, which is a world of material limi­tation, the buyers of my services do apply their yardsticks of use­fulness and cost, as I apply my own valuation to the services of all others. When I buy an auto­mobile, I judge its transportation utility for myself and my family.

When I choose a certain manu­facturer’s model, color, and year, I do not inquire about the human labor embodied in the car. I do not care to know how many hours of countless different kinds of la­bor went into the production of the vehicle itself as well as into the materials and tools which it required. And even if I would in­quire into the quantity and qual­ity of the labor embodied in the car, I would not offer to disregard all considerations of usefulness and cost on account of that labor. In fact, I would not offer to pay double the customary price, or even one dollar more, by reason of knowing more about the human labor spent on its construction.

Man judges material goods and services according to their use­fulness to his moral, intellectual, and physical well-being. In par­ticular, man judges labor services according to their utility for well­being, no matter whether they are embodied in material goods or are rendered directly.

Consumers Prevail

What, then, is the value of my labor in the labor market? If it is not my wishful thinking and day-dreaming that determine its value, who judges my labor? It is the businessmen who combine the factors of production—land, la­bor, and capital—in the manu­facture of material goods and the rendition of services. These busi­nessmen who buy human labor, in turn, receive their orders and scales of valuation from the con­sumers who are the ultimate judges of economic value in the market place.

Millions of consumers deter­mine the economic value of the services rendered by such enter­tainers as Elizabeth Taylor and Patti Page. And simultaneously, they determine the income of these “stars.” A businessman who contracts to buy entertainment services has no choice but to pay the maximum remuneration set and paid by the millions of people who seek entertainment. If, through her appearance in a moving picture, Elizabeth Taylor adds one million dollars in box office receipts to the value of the picture, her promoter-employer has no choice but to pay her in proportion. For if he were to offer her appreciably less, other pro­moters who compete with him would bid up the price until Miss Taylor’s income reflected the en­tertainment value attached to her role by the millions of movie­goers.

The same principles apply to all other professions and occupations. The income of medical doctors is determined by the patients who seek their services; it reflects the dollar amount people are willing to spend on medical services. A patient who seeks treatment of his common cold, for instance, seeks professional help at the low­est possible cost. At a given sup­ply of general practitioners, he may have to spend $5 for an of­fice call, which becomes the mar­ket price for such services and, simultaneously, the doctor’s in­come. If, at a given supply of general practitioners, more peo­ple would seek the doctor’s help, the price for his services, and consequently his income, would tend to rise. If, on the other hand, more qualified men and women would enter the medical profes­sion, at a given demand for such services, the market price, and consequently also the doctor’s in­come, would tend to decline.

The same principles of price and income determination apply also to unskilled labor. As long as human labor is useful in the production of material goods or the rendition of direct services, there will be an active demand for it. This demand is completely en­compassed by the usefulness or utility of the labor. As Elizabeth Taylor’s income is determined by the cash value of the moving pic­tures that contain her entertain­ment services, so is the income of the laborer who repairs the kitch­en sink or sidewalk.

No one, including the laborer of various skills and experiences, can earn more than the value of his product or service rendered; and no one earns much less in our com­petitive individual enterprise sys­tem. The intense competition among numerous promoters and producers closes any potential gap. As the competing film producers are bidding up Miss Taylor’s in­come until it reaches the very limit of her acting value, so do thousands of businessmen bid up the prices and wages of every la­borer. The competition is especial­ly intense for common labor be­cause of its general usefulness in practically every economic enter­prise.

Manifold competition among employers holds my income in ac­cordance with my contribution to economic production. It is true, employers are fallible men who may occasionally overestimate or underestimate the value of my services. In case they overestimate them, the ensuing losses from my employment may cause an instant reduction of my wages, or my dis­missal. In case they underestimate my productive value, they may in­deed earn a profit on my employ­ment. But then, competition for my services will tend to raise me again to the very limit of my pro­ductive worth.

In a free society, the worker himself has the means to insure that his income coincides with his personal productivity. This is his mobility, his freedom to move about in the labor market. If I should feel that my work is not appreciated, that I produce more than I receive, that I could be more productive in other employ­ment, I am free to seek another position in which my productivity is higher or my present produc­tivity is appraised more highly. Numerous employment agencies would eagerly assist me.

Socialist Objections

The socialists would dispute this application of economic prin­ciples to human labor. They would deny that the competition among employers tends to drive wage rates up to the point of product and service value. Businessmen tend to restrain this kind of com­petition, socialists assert, and con­sequently the working man is un­derpaid and exploited.

In the first place, I would reject the implicit charge of collective conspiracy on the part of millions of businessmen. Morally and in­tellectually, they do not differ sig­nificantly from other members of society; and I resent any depic­tion of millions of our fellow men as stonehearted monsters eagerly conspiring to grind others down.

But even if it were true that employers collectively endeavored to exploit their co-workers, they would soon see it is to their own advantage to compete with each other. Let us assume that a col­lege instructor produces an annual net income of $10,000 in student tuition and, therefore, draws a $10,000 salary. Now, if all Ameri­can college presidents were to con­spire to cut instructors’ salaries to $1,000 per year, in order to fill their own pockets or construct more dormitories and lecture halls, new competition would soon void the restraint agreement. For it would be profitable for any col­lege that needs instructors to raise its bid to $2,000, then $3,000, and $4,000, and so forth, thus to earn $8,000, $7,000, and $6,000 re­spectively, rather than watch other colleges earn $9,000 on the man. In fact, it would be profit­able for this college to raise its bid to $9,999 and thus earn one dollar rather than nothing. New colleges in need of a faculty, col­leges that would like to expand on account of the low instruction costs, would be inclined to bid for the necessary labor. In no time at all, new competition would drive instructors’ wages up toward the limit of each instructor’s produc­tive worth.

Furthermore, instructors are protected by their ability to move. Can anyone imagine college professors holding still while the president cut wages? With the speed of a modern jet, they would desert the classrooms and dis­perse throughout American indus­try.

The socialists refuse to see all this; they reiterate their notions of labor exploitation and aim to indoctrinate anyone willing to lis­ten. Their favorite target is the common laborer who earns less than all others. But he is earning less because he is producing less, not because he is exploited. On the contrary, because his labor has such general usefulness, so that even housewives can employ him, in every town, village, and home, the competition for his service is the keenest. How can anyone deny that there is keener competition for such labor than for that of a professional person, for instance, a Ph.D. in astronomy?

The socialists retort that the common laborer lacks the mobility that permits him to find the best possible market. But, in the United States, even the laborer owns an automobile, or at least has access to modern means of public transportation. And his mobility may well be greater than that of persons more likely to own real property that may hamper their freedom to move.

Another standard argument of the socialist is that common la­borers are ignorant of the market opportunities; they do not know where and at what rate they can best market their labor. In reality, this assumption of the worker’s ignorance and stupidity badly un­derrates him. After all, the worker can read the want ads in his daily paper—or find a friend who can read. Workers learn from each other what other employers are paying for similar labor services.

The socialist argument for unionization is that the individual worker is utterly defenseless against the tremendous “holding power” or reserves of industrial­ists—that the workers must unite and face the “monster” in a collec­tive assault. But such generaliza­tion hardly squares with reality. The great number of bankruptcies of all kinds of enterprise disproves the notion that all businessmen have holding power. Many live “from hand to mouth” and en­counter great difficulty in meeting their current obligations. But even if it were true that the worker has fewer reserves, what differ­ence does it make in the deter­mination of wages? Even if the college that employs me as econ­omics instructor has greater “holding power” than I, the poor teacher, my salary would still be subject to the competition among all institutions of learning and to my own mobility in the labor market. Whether or not I have re­serves, my wage will be deter­mined by the willingness of peo­ple to buy higher education.

In trying to prove that labor is exploited, socialists use one argu­ment that I find especially irk­some. They describe in darkest colors the labor conditions of mil­lions of immigrants. These poor and ignorant persons, we are told, suffer exploitation and abuse, without a voice of protest, in an alien country that is preying on their timidity and misery. As an immigrant, I resent these socialist charges and reject them. Who, pray tell, has shown greater mo­bility in the labor market than the immigrant who has moved many thousands of miles, crossed oceans and borders, learned different languages and customs, in order to find the best possible market for his particular labor services? With such impressive record of mobility, he could move again, to another state or county, even to another country or back to his na­tive land, at the first sign of ex­ploitation. The allegation that anyone has taken advantage of him, ground him into poverty and misery, is absurd.

Exploitation Abroad

The socialists, however, do not readily withdraw their charges of capitalist exploitation. They point to the miserable labor conditions and incredibly low wages in un­developed countries. Do these not represent examples of human ex­ploitation? It is true, of course, that Asia and Africa are bur­dened with poverty and misery. But these cannot be placed on the doorsteps of the market system. The peoples of Asia and Africa long have labored under utterly different systems of economic or­ganization, such as tribal com­munism or feudalism. And today, they prefer state socialism over the market order which they de­spise and denounce. Any exploita­tion and misery they suffer must be attributed to the systems they have embraced—not to compet­itive capitalism.

But what about those countries in Europe and Latin America that are organized along lines of the market order and yet labor in relative poverty? Do they not re­veal the presence of labor exploita­tion?

Many Latin American countries suffer not only from the remnants of feudalism but also from radical government intervention. Under these institutional handicaps, la­bor productivity has stayed rela­tively low. The capital invested in production facilities is relatively scarce when compared with that of the U.S.A. Consequently, labor productivity is lower in those lands, and wage rates fall short of American rates.

The American worker earns a higher income than his European or Latin American counterpart because of his higher labor pro­ductivity. And this higher pro­ductivity is the result, not of such ambiguous qualities as IQ, know-how, diligence, or physical strength, but greater help from capital in the form of better tools, equipment, machines, and other facilities of production. The American worker may be equipped with $20,000 worth of power tools, representing 10,000 units of horse power, while his South American neighbor labors with crude tools and equipment. Consequently, the American worker produces much more per hour of labor and, there­fore, earns much more than his unfortunate neighbors.

Why is it that Americans have more capital invested per worker than in any other country? The ultimate reason for their higher investment and productivity must, of course, be sought in the dif­ferent economic systems. These, in turn, are conditioned by the different political, social, and eco­nomic philosophies. During more than 150 years of American his­tory, the people enjoyed an un­precedented degree of individual freedom and unhampered enter­prise, with safety for private property and capital investment. People were free to save and in­vest, build and create, without an omnipresent and omniscient state. Private property was safeguarded, so that it could be invested to im­prove working and living condi­tions.

Europeans, too, under the ideo­logical and economic leadership of Great Britain, had made a con­spicuous beginning on this road of individual freedom and private property. But toward the end of the nineteenth century, they re­lapsed into various manifestations of collectivism. Enmeshed in ideas and notions of social conflict, the desirability of economic equality, redistribution of wealth and in­come, government supervision and control, they have reverted toward socialism, conflict, and war. Their governments have dissipated capi­tal resources and hampered indi­vidual economic development. And that trend, unfortunately, is sweeping over America, too.

The important fact is that the differences in political, social, and economic outlook explain the dif­ference in income and wealth. The “know-how” that once set America apart from the rest of the world is not technological, nor biological, but the knowledge that freedom best serves the interest of individuals and of mankind.

  • Hans F. Sennholz (1922-2007) was Ludwig von Mises' first PhD student in the United States. He taught economics at Grove City College, 1956–1992, having been hired as department chair upon arrival. After he retired, he became president of the Foundation for Economic Education, 1992–1997.