The Limitations of Profit-Sharing; H. Hazlitt

Henry Hazlitt The Limitationsof Profit-Sharing A funny thing happened on March 28 of this year. The New York Times ran as its leading editorial a piece entitled "Best Idea Since Keynes." This must have puzzled many read ers. The main idea of Maynard Keynes was that the sovereign rem edy for almost any economic depres sion was more credit creation, Le., inflation. Bitter experience has al ready taught an increasing number of economists that this is the most dangerous "remedy" of all. Passing over this difficulty, what is this "best idea since Keynes"? Ac cording to the Times editorial writer -profit-sharing! He treats this as if it were a brand new idea, and gives all the credit for it to "Martin Weitzman, an M.LT. economist, ... in a readable little book, called The Share Economy Henry Hazlltt has had a long and distingUished career as economist, journalist, author, editor, and literary critic.

538 which was published last Octo ber.... The core of his idea is some thing like profit-sharing; to change our system of fixed-rates to one in which workers' incomes are deter mined by company performance." The Times thought so much of this that it ran another article on the same subject about a month later, on April 25. The first thing that needs to be pointed out to the Times is that profit-sharing, as an applied idea in individual firms, is at least nearly two centuries old. It has usually taken the form of a supplementary payment to fixed wages. The first venture of any size seems to have been that of the French National Fire Insurance in 1820. During the nineteenth century it -got a further extensive trial in Britain, Germany, Holland, Italy and Switzerland. There were a number of such "'schemes in the U.S. between 1910 THE LIMITATIONS OF PROFIT-SHARING 539 and 1930, but most of them were abandoned in the depression of the 1930s.

Why weren't there more? Why are profit-sharing arrangements for workers still so rare? Market Determined Salaries Let us begin with the reasons froIll the standpoint of the employer. If he hopes to attract competent workers, he will know that he must offer (even apart from union demands) at least the going market rate of wages or salaries. If he offers his workers a profit-sharing plan, it must be in ad dition to this basic market-rate. Employees for the most part feel that they cannot afford to gamble that they cannot be left in doubt re garding their future income, unless it is almost certain to be larger than the going market rate of wages or salaries. Workers would feel that un der straight profit-sharing their fu ture would be much more dependent on the decisions of management than on their own individual perfor mance. And as we shall shortly see, they would be right. Moreover, the employer in a pros perous firm, instead of offering a profit-sharing plan, has another choice. He can simply offer a specially competent worker a higher salary than the average for that type of work. Most good workers would probably prefer that to a profit-shar·· ing gamble. The employer, in turn, would be free to adjust his payment to each particular case.

Now let us look at profit-sharing further from the standpoint of the employee. The advocates of profit sharing contend that it is or would be a great stimulus to increase the workers' output and effort. This is very doubtful. Let us consider a firm with 100 workers. An individual worker, even if he doubles his effort or output, would stand to increase his individ ual share of profits by only 1 per cent or less. If he worked for a firm with 10,000 employees or more, his in creased share of profits would be in fini tesimal. Of course, if all the workers increased their effort and output they would stand to achieve a more substantial share of profits; but it would be very hard to get them to think collectively, or for each to trust all the others. The Times editorial, perhaps tak ing its cue from the Weitzman book, offers a hypothetical example of how profit-sharing might work in prac tice: "Imagine that General Motors ... had agreed in such negotiations to pay its workers 70 per cent of rev enues. Since it would keep 30 per cent, G.M. would want to keep hir ing as long as the additional workers made any contribution to revenues."

This example reveals that the Times writer did not know what the average division of corporation earn ings has actually been under the 540 THE FREEMAN present wage system. Over a long period of years, as shown by figures compiled annually by the Depart ment of Commerce, nonfinancial corporations have paid about 90 per cent of their total net earnings to their employees and retained an av erage of only about 10 per cent in profits. This division, of course, has not reflected any intention on the part of the corporation stockholders. It has merely been what has hap pened in fact. The Times writer believes that the introduction of profit-sharing would reduce our recent persistent Amer ican unemployment rate of about 7 per cent. It is doubtful that it would have any effect at all in this direc tion. Our unemployment rate has been mainly brought about by two governmental policies. One of these is our legal minimum wage. This has decreed in effect that if a man can not be employed at a certain mini mum legal rate per hour he must not be employed at all. The result was dramatically shown when the min imum wage was first enacted, and threw thousands of teenagers, and particularly black teenagers, out of jobs. The other government policy that assures continued joblessness is high and prolonged unemployment insurance or relief. The Times news columns frequently refer to jobless men and women who have become "too discouraged to look for work."

As long as they have an assured in come whether they work or not, their "encouragement" to look for work will remain low. One final thought. I am assuming that neither Mr. Weitzman nor the Times is proposing to introduce profit-sharing by force. This would be an appalling proposal. But if coer cion is not used, all employers are still free, as they have always been, to offer workers profit-sharing plans instead of straight wages, and unions or individual workers are free to ex press their preference for them. I suspect that risk-taking will con tinue to be left to the entrepreneurs, where it belongs, and that employ ees will continue to prefer the rela tive assurance of a fixed and more dependable income. ® (DEASON LIBERTY To Get a Higher Real Wage THEREIS ONE WAY and only one way for workers to get a higher real wage, and that is by higher production. As workers and management jointly turn out more goods for every hour of work, the real earnings of the worker increase, as they always have, and the standard of living im proves. There is no other answer to the problem. Labor unions cannot raise the standard of living of all the workers, and the fiat of the gov ernment never can do it. The productivity of industry is the only answer.

LAWRENCE FERTIG E. Barry Asmus Donald B. Billings The Moralityof Capitalism A powerful and factual case has been made for the remarkable and un precedented economic progress which inevitably follows the adop tion of competitive capitalism and its central institutions of private prop erty and voluntary social arrange ments. Even Karl Marx, in the Com munistManifesto, pronounced cap italism a great "engine of growth." Undeniably, however, the market system of capitalism continues to be viewed as materialistic, ethically unjust, and consequently immoral by great numbers of people all over the world. This view is especially strong among the majority of so-called intellectuals. Dr. Barry Asmus is an economist and national speaker living in PhoeniX, Arizona. Dr. Don Billings is Pro fessor of Economics at Boise State University. This article is taken from their book, Crossroads: The Great American Experiment, published in 1984 by University Press of America. Reprinted by per mission of the publisher.