Myth: Unregulated capitalism does not exploit workers.
Fact: Without a wage floor, unemployment will drive entry-level wages below the poverty
level.
Summary
Entry-level workers do not usually agree to their wages; they
take whatever is offered. This is because there are more workers
than jobs in the economy, and workers are in competition for those
jobs -- the alternative is starvation. Employers often take advantage
of this to let wages fall as low as they can get away with and
still meet their needs. Allowing such a trend has historically
resulted in greater income inequality. (The top half of the labor
market operates by different dynamics from the bottom half.) Researchers
have produced a broad body of evidence that higher levels of inequality
are correlated with higher mortality rates. Thus, this sort of
exploitation is deadly, and a violation of the right to life.
Democratic government can stop this trend by regulating capitalism
(through minimum wage laws, for example) and creating progressive
taxes. Labor unions are an even more effective method in solving
the destructive competition between individuals seeking jobs.
Argument
Before we can prove that unregulated capitalism naturally
results in exploitation, we have to define what exploitation is.
There are many definitions, but for our purposes here it is whenever
Person A unfairly uses Person B to accomplish Person A's selfish
ends. The central issue, of course, is what constitutes "fair"
and "unfair" use.
This is a rather complex question, one that has inspired scholars
to write volumes of moral philosophy and logic trees. As a result,
there are many ways to argue against the far-right position that
unregulated capitalism doesn't exploit, but perhaps the simplest
way is to agree to all their premises and then show how unregulated
capitalism fails to deliver the goods.
Their basic premises are generally as follows: everyone has a
right to life, liberty and property. However, these are negative
rights, not positive rights. That is, I cannot force you to give
up anything so that I may enjoy life, liberty or property; I merely
have a right to earn these on the free market. All exchanges should
be voluntary and uncoerced.
Does unregulated capitalism deliver justice under such a paradigm?
Not at all. To see why, let's consider the following analogy:
Suppose that you are shipwrecked on a deserted island, which has
a small patch of vegetation that bears enough food to feed you
(and several others, if need be). After a year, a second person
becomes shipwrecked on the island, but you have somehow managed
to establish control of the only food source, and are able to
deny its use to the newcomer. When he objects that he is starving
to death, you counter-argue that he has no right to make positive
claims on your property. But is your refusal a violation of his
right to life? Of course it is.
But suppose he were willing to work for your food. Would you still
be violating his right to life by rejecting his offer? Yes.
Now, suppose you took him up on his offer, but you take advantage
of the situation to impose cruel terms: in exchange for complete
subservience, you give him so little food that he dies of malnutrition
in 90 days. In other words, you give him a "choice"
of either starving to death now or prolonging it by working for
you. Naturally, he will "agree" to his own exploitation.
Is this still a violation of his right to life? To be sure. Could
we call his freedom of choice truly "free?" Absolutely
not, no more than if you held a gun to his head. Notice that the
injustice remains even if you give him larger but still insufficient
amounts of food, so that he lives only a year, or ten years, or
twenty. And all the while suffering from failing health and disposition.
Of course, we should expect a decent person to avoid exploiting
others like this, but history tells us nothing if not that human
beings are highly self-interested, and all too ready to exploit
others when given the opportunity. A prime example is feudal lords
exploiting their serfs for fantastic profit. The supreme self-interest
of individuals is why we no longer give absolute power to kings
or dictators. These observations are entirely consistent with
"realism," a political philosophy which is home to most
conservatives.
Next, let's suppose a third person becomes shipwrecked on the
island, and seeks food. Despite being outnumbered, you still somehow
manage to retain control of the food supply, which is more than
sufficient for three. Your defenses are quite strong and well
designed, and any thought of overthrowing you is completely hopeless.
Therefore, you feel safe in announcing that you will share food
with the first newcomer only, and allow the second to die. Still
wrong? Of course.
Now suppose that you add a refinement to your policy: you don't
care which one of the two newcomers will receive the food; you'll
simply let them bid for it and award the contract to the one with
the lowest bid. As they compete for survival through bidding,
they offer greater and greater subservience in return for less
and less food. Finally, you accept a bid that will effectively
starve one to death in 90 days, and leave the other to starve
to death immediately. Still wrong? No question.
And let's add another refinement: both newcomers are unaware
or uneducated of the implications of the bidding
system you are proposing to them. They happily agree to enter
into bidding, and blame their subsequent deterioration of health
on the glaring sun, their misfortune of being shipwrecked, or
even each other. Does this make the system any more just? Of course
not.
But what if you added a system of promotion? Say, you create an
apprentice position which causes starvation in a year, and a journeyman
position that causes starvation in ten years. Nope
still
not there yet. Now suppose the island periodically receives newly
shipwrecked survivors, and the system grows. To keep downward
pressure on their bids, you make sure to keep a few of them unemployed
and unfed at all times. But you also add a few supervisor positions
that actually offer plenty of food. However, these good jobs form
only 25 percent of the total, and due to the pyramid structure
of the scheme, 75 percent of the newcomers will be excluded from
them by mathematical force. Which is to say, you kill only 75
percent of them. Still wrong?
What if you add income mobility? You rotate all the jobs, so a
person spends only 75 percent of his life struggling, and 25 percent
in true prosperity. In other words, you kill them off only 75
percent as fast. Still wrong? Notice that this injustice becomes
even worse by making this mobility a meritocracy, in which the
smartest or hardest working rise to the top, leaving the bottom
75 percent with almost no hope of breaking in.
Adding other features of unregulated capitalism doesn't rescue
the system from its basic injustice. Suppose your island economy
eventually develops both the tools and technology to cultivate
crops on other parts of the barren island, and you put these items
and education up for sale (or barter, in this case). Of course,
the workers are already starving, so they can't afford it. Only
the supervisors will. (This generosity of opportunity is much
like the NBA announcing that short people are free to try out
for their basketball teams.) When the supervisors strike out on
their own, they will create and hoard their own means of production.
In other words, they will spread the same bad system to other
parts of the island, including the unemployed, the exploited workers,
and the well-compensated supervisors.
But doesn't adding competition between owners change things? Don't
they compete to offer better wages to workers? Yes, they do
but only to the better workers, namely, the supervisors. An owner
has only so much he can pay his workforce. If he wants to attract
the best workers, it seems more logical to attract them at the
supervisor level, not the entry level. (This "logic"
is not entirely true, but it is given a major assist by the self-interest
of those making these decisions.) Needless to say, the more you
pay supervisors, the less you can pay workers. But suppose this
strategy works; your talented supervisors increase your production.
Don't you have enough now to hand out raises to your workers?
There are two possibilities: if your rival stays competitive with
you, and makes similarly large salary offers to your supervisors,
then the bidding war continues to divert any wage increases away
from workers and towards supervisors. But if you bury your competition,
then you become a monopoly, and you're back at square one: able
to exploit your workers without fear of competition. Notice that
this is not a zero-sum argument; it works even when the economy
is growing.
What if the tools, education and technology escaped to the masses,
and everyone started growing their own crops on their own property
lots? Despite overturning the old system, it will naturally reemerge.
Why? Because true self-sufficiency is hermitism, which is an inefficient
method of survival. It's much more profitable to specialize in
a particular job skill and become a member of an interdependent
group. But interdependent groups involve an hierarchy of apprentices,
journeymen and supervisors. (Try imagining a business operating
without someone to coordinate the efforts of its workers, especially
in a large, complex operation.) Furthermore, unemployment is a
natural feature of economies (Milton Friedman won a Nobel Prize
for his discovery of the "natural rate of unemployment.")
So the same downward pressure on entry-level wages will reappear,
along with the same pyramid scheme of income and power. Back to
square one.
The main question in all of this, of course, is why the first
person on the island should be given absolute ownership of the
property. "First come, first serve" is a terrible policy
for property ownership, because it attaches moral significance
to one's order of arrival, not to individuals themselves and their
labor. Which, the more you think about it, is quite indefensible.
An obvious solution is to remove property ownership from the hands
of a few individuals and give it to all individuals. There are
a number of ways to do this: one is to make everything public
property, to be used freely by all. However, most people object
to pure communism on the grounds that it's nice to have a sense
of privacy, and they like relying on things to be there when they
want them or need them. Pure communism also reduces the incentive
to work, since instead of producing what you yourself will use,
you can always use what is already in existence and used by someone
else.
Another method is to give everyone equal shares. This will involve
continually subdividing property for the immigrants and newborns
who join the group. (Failing to accommodate these newcomers will
only result in the unjust system outlined above.) Continual subdivision
is actually the system we use in modern democracies. The entire
group owns all the property, and they vote (through representative
government) on how this property is to be used. The voters have
created a highly liberal system of property use, allowing great
deal of personal freedom and privacy in the use of the nation's
property. But ultimately it belongs to the government -- something
which many people tend to forget. (You may think your property
is all yours, because, after all, you own the deed and title.
But these documents identify property as recognized by the
government.) And the group votes to redistribute this property
in the form of taxes, and control it through the passage of laws.
Thus, democracy is the antidote to the injustice that occurs under
unregulated capitalism.
There are degrees of regulated capitalism, of course. The island
economy described above is an extreme example, but by gradually
increasing democratic regulation, we can gradually reduce its
unjust features. The next question we face is: does the United
States really compare to our hypothetical island economy? And
if so, by how much?
Exploitation in the United States
Perhaps the first question to resolve is: are some workers
under capitalism paid so little that they die early? The answer
is a resounding yes: a great many studies have found a significant
correlation between income level and mortality rates. (1) In 1986,
researchers studied two groups of men between the ages of 25 and
64: those that made less than $9,000 a year, and those that made
more than $25,000. They found that poor white men had 6.7 times
the death rate of rich white men, and poor black men had 5.4 times
the death rate of rich black men. (2) In 1995, the life expectancy
for white males was 73.4 years, and for black males it was 65.4
years, eight years lower. (3) Racial differences in homicide and
drug abuse rates account for less than two years of this eight-year
gap, but even these behaviors are correlated to poverty. (4) And
death rates are only the tip of the iceberg; they indicate still
broader health problems within a population.
Why are health and life expectancy correlated to income? Perhaps
the most obvious answer is that the poor can't afford the same
health care. But in fact there are hundreds of reasons why the
poor have higher rates of death, disease and injury. The poor
live and work in more toxic environments; they have less adequate
diets; they are exposed to greater dangers and risks, both human
and non-human; they cannot afford the safety features or creature
comforts that make living safer or easier; and they have less
access to education about things that would extend their lives.
Conservatives object that the poor in the U.S. are better off
than the poor elsewhere, and our rising standard of living negates
any perceived injustice in these differences. Not so. Two important
studies -- one from Harvard, the other from Berkeley -- have found
that inequality of income is significantly correlated to mortality
rates as well. (5) In other words, it's not just absolute poverty,
but relative poverty that also contributes to higher death rates.
In a study of all 50 states, they found that that the states with
the highest income inequality had the highest death rates (and
this was for all age groups, by many different causes). The studies
also contained some surprises. Dr. Bruce Kennedy said: "We
found that mortality was strongly related to inequality in the
distribution of income, but not to the median income or per capita
income of a state." (This is also true internationally; the
U.S. is richer per capita than Europe, but the U.S. has the highest
levels of inequality, hence the highest death rates as well.)
Dr. George Kaplan said: "The evidence in these two studies
suggests that the increased death rates in those states are not
due simply to their having more poor people. Income inequality
seems to be increasing mortality rates among nonpoor people as
well, and we are investigating that possibility." (6)
Poverty kills millions before their time, and condemns a great
many more to diminished lives. If it is indeed exploitation that
is causing this, then it is a mass violation of people's right
to life. But is exploitation the reason?
The oversupply of workers
In our example of a simple island economy, the property owner
was able to exploit by offering only one job to the two survivors,
and letting them bid for it. Their resulting competition for lower
wages is a perfect example of the law of supply and demand: when
the supply of labor is up, prices (or wages) come down. The modern
labor market works no differently.
The U.S. keeps an intentional 5-6 percent unemployment rate, part
of what Milton Friedman calls "the natural rate of unemployment."
Whenever unemployment falls below that, the economy starts "overheating,"
or developing a bad case of inflation. To combat this, the Federal
Reserve tightens the money supply, which lowers inflation but
raises unemployment back to 5-6 percent.
What this means is that there will always be more workers than
jobs, and workers have to compete for those jobs, accepting lower
wages to get them. Of course, most young people who apply for
a job at a fast-food restaurant do not enter into hard-nosed wage
negotiations with management. Management is so in control of the
process that a job applicant often simply accepts whatever management
offers, having entered the establishment with a good idea of what
to expect.
The oversupply of workers means that the higher the unemployment,
the lower the wages. An example of this correlation can be seen
in the recession of 1982, when unemployment nearly hit 11 percent
in the fourth quarter, and real hourly wages fell nearly 50 cents
from three years before. The flip-side to this example is the
1980s "Massachusetts Miracle," when unemployment fell
to a phenomenally low 2.7 percent, and McDonald's began offering
twice the minimum wage trying to lure seniors out of retirement.
(7)
Some people object that this is too simplistic, that the labor
market is a complicated place with rapidly shifting demands for
rapidly shifting job skills. This is true, although mostly for
the top half of the labor market. Take the computer industry,
for example. A single renovation like Java can instantly create
a labor market for Java programmers and destroy a labor market
for obsolete ones. Not anyone can shift into these new jobs; it
takes a specially trained experts. This plays havoc with the laws
of supply and demand. But the bottom half of the job market is
unskilled, and therefore homogenous. Almost anyone can flip burgers
or mop floors. The homogeneity of the entry-level work force means
that it is highly responsive to the general unemployment rate.
You can see the inverse correlation between unemployment and wages
in the following chart. Forget, for the moment, the long-term
decline in wages visible from 1973 to today. (We'll get to the
reason for that in a moment.) Instead, observe the short-term
fluctuations during recession years. Notice that when unemployment
peaks sometime around a recession, wages fall. When unemployment
gradually starts falling during a recovery, wages rise. This relationship
is not exact, but it's close enough to detect a significant correlation.
Also notice that this inverse relationship changed in 1985, when
another factor began creating an oversupply of workers: the entrance
of more Baby Boomers and women into the workforce. Their entrance
applied even more downward pressure on wages, despite being in
a recovery.
Average hourly wages (constant 82 dollars), unemployment rate, and labor force participation rate by civilian population (8) Avg. Unemp. Labor Year Wage Rate Participation ---------------------------------- 1970 $8.03 5.0% 57.4% 1971 8.21 6.0 56.6 1972 8.53 5.6 57.0 1973 8.55 4.9 57.8 1974 8.28 5.6 57.8 < recession 1975 8.12 8.5 56.1 < recession 1976 8.24 7.7 56.8 1977 8.36 7.1 57.9 1978 8.40 6.1 59.3 1979 8.17 5.9 59.9 1980 7.78 7.2 59.2 < recession 1981 7.69 7.6 59.0 1982 7.68 9.7 57.8 < recession 1983 7.79 9.6 57.9 1984 7.80 7.5 59.5 < upturn in labor participation 1985 7.77 7.2 60.1 1986 7.81 7.0 60.7 1987 7.73 6.2 61.5 1988 7.69 5.5 62.3 1989 7.64 5.3 63.0 1990 7.52 5.5 62.7 < recession 1991 7.45 6.7 61.6 < recession 1992 7.41 7.4 61.4 1993 7.39 6.9 61.6 1994 7.40 6.1 62.5 1995 7.40 5.6 62.9
From 1970 to 1984, you can see wages responding to recessions
and recoveries, with the influx of new workers overwhelming this
relationship after 1985. But what about the long-term decline
in wages? Let's take a closer look at that.
Falling wages
To compensate for falling wages, Americans have been working
longer workweeks, sending a second spouse to work, taking fewer
and shorter vacations, etc. This boosts income statistics for
families and households -- which conservatives love to cite --
but they are somewhat unreliable, since they do not reflect falling
individual incomes. One way to sidestep these statistical problems
is simply to measure the aggregate gains of entire income groups
during the 1980s:
Percent Increase of Combined Salaries by Income Group, unadjusted for inflation (1980s) (9) Income Group Percent Increase ------------------------------------- $20,000 - 50,000 44% 200,000 - 1 million 697 Over $1 million 2,184
To put this chart in perspective, 85 percent of the American workforce
was making less than $50,000 a year in the 80s. And inflation
for the 80s totaled about 50 percent, which means that middle
class income gains didn't even keep up with inflation. Meanwhile,
the incomes of the super-rich sky-rocketed.
The following chart shows an even clearer picture of growing inequality.
It shows how large a slice of the national pie for family income
was received by each quintile (or 20 percent group):
Share of aggregate family income by quintile (percent) (10) Year Lowest Second Third Fourth Fifth Top 5% ----------------------------------------------------------- 1980 5.1% 11.6 17.5 24.3 41.6 15.3 1994 4.2 10.0 15.7 23.3 46.9 20.1
Notice that the bottom 80 percent saw a shrinking slice of the
pie. Even in the top quintile, all the growth was concentrated
in the top 5 percent (actually the top 1 percent). Recall the
Harvard and Berkeley studies which found a correlation between
inequality and mortality rates. Health researchers confirm that
over the 80s, the gap between white and black death rates (to
use an example) did indeed widen. (11)
The weakness of middle class incomes had nothing to do with their
productivity. Between 1980 and 1994, individual worker productivity
grew about 1 percent a year. Combined with population growth,
this resulted in the Gross Domestic Product growing from $3.9
trillion to $5.3 trillion (in constant 87 dollars). Per person,
that should have represented an increase from $16,584 to $20,476.
(12) But, despite working longer, harder and more productively,
workers have seen the profits go to the very top. In fact, economist
Paul Krugman calculates that 70 percent of all income gains in
the 80s went to the richest 1 percent! (13)
How could this be happening? By 1980, the U.S. had finished two
decades of the greatest equality it had ever known. Poverty had
been reduced to a record-low 11 percent. The secret was progressive
taxation and regulation. Our government at that time simply did
not allow the natural downward pressure on wages to occur. Laws
established a minimum wage which provided a stopping point in
the workers competition for jobs. The top tax rate ranged between
70 and 91 percent, which prevented wealth from concentrating in
the hands of the richest, and redistributed it back to the poor
and the middle class.
All that changed in 1981, when Ronald Reagan became president.
He froze the minimum wage for the next nine years, allowing inflation
to reduce the earning power of the working poor. He immediately
imposed a moratorium on all new regulation, and began slashing
and burning what already existed. The Federal Register,
the book where all of America's proposed and adopted regulations
are found, was cut almost in half -- from 87,012 to 47,418 pages
-- between 1980 and 1986 alone. (14) (This trend continues to
this day.) Taxes on the rich were also slashed, from 70 percent
to as low as 28 percent.
The result of all this was that the U.S. moved closer to unregulated
capitalism, and the natural downward pressure on wages was allowed
to take place. The only reason the exploitation did not become
even worse was because some regulation and progressive taxation
remained. Increasing them is one way to reduce exploitation --
although to what degree this should be done is a matter of voter
judgment. It would be difficult to assign an exact point on the
spectrum where inequality turns into exploitation, so perhaps
the best policy is to recognize that it is a spectrum, with greater
deregulation resulting in higher death rates and abuse.
The best solution, however, is not through government, but through
labor unions. Government is an indirect and inefficient tool for
stopping exploitation; organized labor goes straight to the heart
of the problem. The worker's difficulties arise from the fact
that he must compete with others for jobs. But if they join together
to initiate collective bargaining, they eliminate downward pressure
on wages, and negotiators can strike a more honest wage agreement.
Notice that conservatives and libertarians have no valid reason
to oppose collective bargaining. They believe that contracts should
be voluntarily agreed to by both parties (even if negotiations
turn out to be tough), and they believe in the right of free association.
The only reason to oppose labor unions, then, is because they
threaten the interests of the upper class.
Return to Overview
Endnotes:
1. George Davey Smith and others, "Socioeconomic Differentials
in Mortality Risk among Men Screened for the Multiple Risk Factor
Intervention Trial: I. White Men," American Journal of
Public Health Vol. 86, No. 4 (April, 1996), pgs. 486-496;
George Davey Smith and others, "Socioeconomic Differentials
in Mortality Risk among Men Screened for the Multiple Risk Factor
Intervention Trial: II. Black Men," American Journal of
Public Health Vol. 86, No. 4 (April, 1996), pgs. 497-504;
Gopal K. Singh and Stella M. Yu, "US Childhood Mortality,
1950 through 1993: Trends and Socioeconomic Differentials,"
American Journal of Public Health Vol. 86, No. 4 (April,
1996), pgs. 505-512; C. Wayne Sells and Robert Wm. Blum, "Morbidity
and Mortality among US Adolescents: An Overview of Data and Trends,"
American Journal of Public Health Vol. 86, No. 4 (April,
1996), pgs. 513-519.
2. Robert Pear, "Big Health Gap, Tied to Income, Is Found
in U.S." The New York Times, July 8, 1993, pp. A1.
3. "Vital Statistics Report Shows Broad Gains in the Nation's
Health," DHHS News, U.S. Department of Health and
Human Services, October, 1996. The report is available from the
National Center for Health Statistics, 6525 Belcrest Rd., Hyattsville,
Md. 20782 or by e-mail at paoquery@nch10a.em.cdc.gov.
4. The Centers for Disease Control report that eliminating homicide
completely would add only 3 months to general life expectancy.
Black males account for 6 percent of the population, but 40 percent
of all homicide victims. That is about 20 months less life expectancy
for black males. Deaths from drug abuse are far lower.
5. George A. Kaplan and others, "Inequality in income and
mortality in the United States: analysis of mortality and potential
pathways," British Medical Journal, Vol. 312 (April
20, 1996), pgs. 999-1003. Also Bruce P. Kennedy and others, "Income
distribution and mortality: cross sectional ecological study of
the Robin Hood index in the United States," British Medical
Journal, Vol. 312 (April 20, 1996), pgs. 1004-1007.
6. Kaplan and Kennedy quoted in Robert Pear, "Researchers
Link Income Inequality to Higher Mortality Rates," The
New York Times, Friday, April 19, 1996.
7. For 1982 recession data, see footnote 8; for Massachusetts
example, see Paul Krugman, Peddling Prosperity (New York: W.W.
Norton & Company, 1994), p. 41.
8. Average Hourly Wages (Total private industry, 1982 dollars):
U.S. Bureau of Labor Statistics, Series ID: eeu00500049; Unemployment
Rate, Civilian Labor Force, 16 and older, Seasonally Adjusted:
U.S. Bureau of Labor Statistics, Series ID: lfs21000000; Civilian
employment as a percentage of civilian non-institutionalized population
(16 yr. and over, seasonally adjusted): U.S. Bureau of Labor Statistics,
Current Population Survey, Series ID: lfs1600000.
9. Internal Revenue Service data reported in Donald Barlett and
James Steele, America: What Went Wrong? (Kansas City: Andrews
and McMeel, 1992), p. 1.
10. U.S. Bureau of the Census, Current Population Reports,
Series P60
11. Pear, "Big Health Gap."
12. U.S. Bureau of Economic Analysis, National Income and Product
Accounts of the United States: volume 2, 1959-88, and Survey
of Current Business, March 1995.
13. Paul Krugman, "The Rich,
the Right, and the Facts," The American Prospect no. 11 (Fall 1992): 19-31.
14. "Rolling Back Regulation," Time, July 6,
1987, p. 51.