Who Fixes Wages? H. Sennholz

HANS F. SENNHOLZ 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 so cialism. Some prices directly relate to the economic actions of compara tively few buyers and sellers. Others, however, are of utmost importance for nearly all individ uals. 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 an guish and disgust about this prop osition that applies the economics of price to human labor. "How heartless and merciless," they proDr. Sennholz heads the Department of Eco nomics at Grove City College, Pennsylvania. 30 claim, "to apply economic calcula tion and cost consideration to la bor 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 useful ness and cost, and attach an ex ceptionally high value to my serv ices. I could then revel in leisure and luxury and, in turn, pay no at tention to other people's labor costs. But in our world of reality, which is a world of material limi tation, the buyers of my services do apply their yardsticks of use fulness and cost, as I apply my own valuation to the services of all others. When I buy an auto mobile, I judge its transportation utility for myself and my family.

1965 WHO FIXES WAGES? 31 When I choose a certain manu facturer'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 la bor went into the production of the vehicle itself as well as into the materials and tools which it required. And even if I would in quire into the quantity and qual ity 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 j udges material goods and services according to their use fulness to his moral, intellectual, and physical well-being. In par ticular, man judges labor services according to their utility for well being, 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 daydreaming that determine its value, who judges my labor? It is the businessmen who combine the factors of production - land, la bor, and capital - in the manufacture of material goods and the rendition of services. These busi nessmen who buy human labor, in turn, receive their orders and scales of valuation from the con sumers who are the ultimate judges of economic value in the market place. Millions of consumers deter mine the economic value of the services rendered by such enter tainers 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 pro moters who compete with him would bid up the price until Miss Taylor's income reflected the en tertainment value attached to her role by the millions of movie goers.

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 32 THE FREEMAN November 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 low est possible cost. At a given sup ply of general practitioners, he may have to spend $5 for an of fice call, which becomes the mar ket price for such services and, simultaneously, the doctor's in come. If, at a given supply of general practi tioners, more peo ple 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 profes sion, at a given demand for such services, the market price, and consequently also the doctor's in come, 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 prod uction of material goods or the rendition of direct services, there will be an active demand for it. This demand is completely en compassed by the usefulness or utility of the labor. As Elizabeth Taylor's income is determined by the cash value of the moving pic tures that contain her entertain ment services, so is the income of the laborer who repairs the kitch en 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 com petitive individual enterprise sys tem. The intense competition among numerous promoters and producers closes any potential gap. As the competing film producers are bidding up Miss Taylor's in come until it reaches the very limit of her acting value, so do thousands of businessmen bid up the prices and wages of every la borer. The competition is especial ly intense for common labor be cause of its general usefulness in practically every economic enter prise.

Manifold competition among employers holds my income in ac cordance with my contribution to economic production. It is true, employers are fallible men who may occasionally overestimate or underestima te 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 dis missal. In case they underestimate my productive value, they may in deed earn a profit on my employ ment. But then, competition for my services will tend to raise me again to the very limit of my pro ductive worth. In a free society, the worker 1965 WHO FIXES WAGES? 33 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 recei ve, that I could be more productive in other employ ment, I am free to seek another position in which my productivity is higher or my present prod uc tivity is appraised more highly.

Numerous employment agencies would eagerly assist me. Socialist Objections The socialists would dispute this application of economic prin ciples to human labor. They would deny that the competition among employers tends to dri ve wage rates up to the point of product and service value. Businessmen tend to restrain this kind of com petition, socialists assert, and con sequently the working man is un derpaid and exploited. In the first place, I would reject the implicit charge of collective conspiracy on the part of millions of businessmen. Morally and in tellectually, they do not differ sig nificantly from other members of society; and I resent any depic tion 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 col lege instructor produces an annual net income of $10,000 in student tuition and, therefore, draws a $10,000 salary. Now, if all Ameri.

can college presidents were to con spire to cut instructors' salaries to $1,000 per year, in order to fill their own pockets or construct more dormi tories and lecture halls, new competition would soon void the restraint agreement. For it would be profitable for any col lege 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 re spectively, rather than watch other colleges earn $9,000 on the man. In fact, it would be profit able 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, col leges that would like to expand on accoun t 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 produc tive worth. Furthermore, instructors are protected by their ability to move.

Can anyone imagine college pro34 THE FREEMAN November fessors holding still while the president cut wages? With the speed of a modern jet, they would desert the classrooms and dis perse throughout American indus try. The socialists refuse to see all this; they reiterate their notions of labor exploitation and aim to indoctrinate anyone willing to lis ten. 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.