SYSTEMS MATTER Part 12: Wages

by Dr. James W. Jackson

Founder, Project C.U.R.E.
Author, The Happiest Man in the World: Life Lessons from a Cultural Economist

Thank you for all your kind responses to our taking the time to simply review the heritage we have in our free enterprise system. Systems do matter. I am amazed at how many people in the United States have no foggy idea how our system works, why it has allowed us to experience more wealth than any other country in history, or how it compares with less efficient systems used in other nations of the world. We just presume that the benefits have always been here and will always actively remain in place to keep us wealthy. That is not true.

In the more than 150 countries where I have traveled and worked, I have listened to the heart cry of the people who would give almost anything to enjoy the cultural and economic advantages we enjoy. But almost as sad is the realization, when I return home again, that our own citizens know so little about our country, cannot explain how our systems came to be, or are unable to relate to how easily we could, and are, losing those economic and cultural advantages.

Our people have no basis for comprehending that each time government entities impose another layer of regulations limiting our historic freedoms of economic and cultural choices, and each time there is imposed another impediment of higher taxation, fees, duties, and permits, we lose to the same degree the magic and efficiency of free enterprise, and eventually we lose the wealth and strength of our nation.

The key to wealth of a nation is new production and growth and the ability to increase income. Everybody has to end up better off. Our economic system has always been based on freedom of economic and cultural choice. Our national success has existed largely because of our system of free enterprise.

In the last few sessions, we have discussed the highly efficient way that the free enterprise system freely collects, measures, and distributes signals and information of all kinds to the necessary decision makers within the economic system. No centralized system of committees or Marxist Gosplan could ever come close to matching such efficiency or accuracy. The basic signaling components of the system include prices, profits, losses, and wages.

We will now focus our discussion on the concept of

• Wages: The compensation resulting from the labor of a person is usually referred to as wages. In the beginning, the whole result of labor belonged to the laborer. But eventually the laborer had to deal with a landlord because he didn’t own the land. The amount of rent payable to the landlord for the use of the land then had to be subtracted from the laborer’s gross compensation. The laborer eventually had to subtract out additional amounts for capital improvements, like tools, transportation equipment, and, perhaps, livestock.

The person who tills the land doesn’t usually have the means to cover his living expenses until he harvests and sells a crop, so he hires out to a landowner who agrees to advance him enough to cover his necessities during the year. Now, the landowner or farmer who employs him has no interest in doing so unless the capital he has put out is returned to him, plus a profit. That profit becomes another deduction that the laborer has to recognize from the production of his labor on the land. That scene and sequence is played out in nearly every other example of manufacturing or industry. The workman needs someone to cover his necessities until the product is manufactured and sold.

The laborer ends up with his share of the endeavors, and that becomes his profit. The owner subtracts all the costs of the endeavors from the amount he receives from the sale of the goods. That amount becomes his profit. Adam Smith wisely perceived that 

“A man must always live by his work, and his wages must at least be sufficient to maintain him.”(1) 

“What are the common wages of labor, depends everywhere upon the contract usually made between those two parties, whose interests are by no means the same. The workmen desire to get as much, the masters to give as little as possible. The former are disposed to combine in order to raise, the latter in order to lower the wages of labor.”(2)

Ultimately, wages are dependent upon productivity. There is a positive correlation between the value of what is produced and the wage paid to produce it. The information from those signals moves silently and quickly. A firm that pays a wage that exceeds the value that the laborer produces is quickly out of business.

But what signal tells the firm that it is paying too little or less than the value that the laborer has produced? It is the beautiful and efficient concept called competition. This concept is also foreign to the Marxist socialist system. But the free enterprise system operates here in fairness so that in the system everybody ends up better off.

If a business is paying a worker ten dollars per hour, but the worker is producing goods in excess of twenty-five dollars per hour, another like-kind business is going to snatch up that worker and offer to pay him nearly twice as much as he is presently earning. Guess what the worker is going to do? Wages in a competitive market reflect the productivity of the labor.

Two of the factors that triggered the ranting and raving of Karl Marx and Friedrick Engles were profit and capital. They believed that there should be no such thing as profit. If the workers owned everything, produced everything, and distributed everything, then there would be no need for profit, and all the workers would have more. They also totally misunderstood the concept of capital, and wished to eliminate every capitalist and everything having to do with capitalism.

Communism tries hard to fan the hatred between the classes. The workers were pitted against owners. Capital has to do with more than just money; it simply has to do with “stuff.” Economists refer to human capital, for example, as the additional sets of skills and experiences that a worker brings to the marketplace. Human capital can be increased by a person through years of experience in a certain field, through additional formal education, or advanced training.

As related to wages, any kind of capital, including human capital, that supports the worker increases his ability to produce at a higher level, thus increases his likelihood of a higher wage. The higher level of productivity that comes with a construction worker who has appropriate tools for the job increases his wage earning value in the marketplace. Marx simply didn’t get the concept that the stock of capital that supports the worker increases his productivity and his possibility for increased wages. Terms like, capital, capitalist, and capitalism really should have had nothing to do with the argument of class struggle or revolutionary war cries. That mantra was a political spin needed to fan the flames of the Bolshevik Revolution

Business owners find that by investing capital into their ventures they can greatly boost the efficiency and profitability of their enterprise. The capital infusion increases the productivity and the higher productivity leads to higher wages. The higher productivity can also result in higher distribution possibilities that can increase profits and allow for additional infusions of capital. Everybody ends up better off.

When impediments are placed on the businesses through additional regulations, restrictions, or higher taxes, there is less growth, fewer profits, less money for capital infusion, less productivity, fewer increases in wages, fewer distribution possibilities, and fewer wealth possibilities for both the individuals and the nation.

Wages and the economic subsets of competition, capital, and production, along with the other components of prices, profits, and losses, are incredible sources of information and signals that guide the efficiency of the free enterprise system.

Contrary to the economic philosophy of the Marxist socialists’ model, reason seems to bear out that what is good for the capitalist is also good for the worker.

Next Week: Not Raising Hogs

             (Research ideas from Dr. Jackson’s new writing project on Cultural Economics) 

© Dr. James W. Jackson   

Permissions granted by Winston-Crown Publishing House

  

www.drjameswjackson.com  

Dr. James W. Jackson often describes himself as "The Happiest Man in the World." A successful businessman, award-winning author and humanitarian, Jackson is also a renowned Cultural Economist and international consultant, helping organizations and governments to apply sound economic principals to the transformation of culture so that everyone is "better off."

As the founder of Project C.U.R.E., Dr. Jackson traveled to more than one hundred fifty countries assessing healthcare facilities, meeting with government leaders and "delivering health and hope" in the form of medical supplies and equipment to the world's most needy people. Literally thousands of people are alive today as a direct result of the tireless efforts of Project C.U.R.E.'s staff, volunteers and Dr. Jackson. 

To contact Dr. Jackson, or to book him for an interview or speaking engagement: press@winstoncrown.com

SYSTEMS MATTER Part 11: Profits and Losses

by Dr. James W. Jackson

Founder, Project C.U.R.E.
Author, The Happiest Man in the World: Life Lessons from a Cultural Economist

Repeatedly we have asked why some countries are poor and other countries are rich. Our discussions keep bringing us to the conclusion that the countries that are wealthy, or becoming wealthy, are those that are capable of producing higher levels of income. Those higher levels of income are generated from successful production of goods and services based on the effective use of the country’s natural resources.

In order to make the best and most productive use of the natural resources in a country, the individuals within that country must experience cultural and economic freedom. They must be free to pursue their own interests and be allowed to make choices that they personally determine will result in their ending up better off. When those freedoms exist, the individuals are allowed to generate higher incomes by creating new wealth to be enjoyed by themselves and their country. To the degree that those freedoms are denied or restricted, the country will be less wealthy.

It is good to remember that profits are absolutely necessary to the existence of enterprises. Not very many people would run the risks of ever establishing a business without the possibility of making a profit. Without businesses, we wouldn’t have the goods and services we enjoy and to which we have become so accustomed. But let’s take a deeper look at the function of profit.

• Profit: The phenomenon of profit is the indicator of growth. It is the mechanism that sends the message that growth is being experienced in the economic system. Profits inform us of the positive value that has been added to the country’s economy, sometimes referred to as the gross domestic product (GDP).

A technology company in the Silicon Valley of California might take a measure of sand and transform it from the recognizable sand granules into a highly desirable and useful computer chip. They may sell the computer chip to another manufacturing company or to an individual. The expense required to transform the sand into a marketable product would be considered their cost. The money received from the purchaser of the computer chip would be their sales price. The difference between the chip manufacturer’s costs and the sales price would be the company’s profit. When the company registers its newly generated profit, it simultaneously records that the wealth of the nation has just increased by the same measure. That wealth represents brand new just- created riches that up until that time had neither existed nor been recorded.

Effectively built into the free enterprise economic model are inherent signals and guidelines that work for increased success and growth. No one specifically designed the model to offer such signals . . . it just functions that way. But those signals and responses all happen so quickly and so silently, even without any individuals or committees in control of the signals. As a result of the simple market forces, individuals are guided to use the nation’s natural resources in the best and most efficient way. That is all possible because the consumers, as well as the business folks, act with the same cultural and economic freedom of choice in the specific areas of  their self-interest. They also believe that their choices will make them better off in the end.

When the consumers buy goods and services, their collective purchases direct resources to businesses that are meeting consumer wants. Their actions also direct resources away from businesses that are not meeting consumer wants. If the consumers purchase enough of a certain product to create a profit for the business, then the business can receive and rely on the signal that it should continue to offer that product for sale.

Adam Smith saw all of those seemingly instant and automatic signals coming out of the existence of the free enterprise economic model, and referred to the anomaly as the invisible hand. That invisible hand utilized all the unintended consequences of all the individuals who were simply acting with cultural and economic freedom of choice while pursuing their own operations of self-interest.

Even high profits send an important signal and serve a necessary function. High profits attract other players into the industry. As new businesses come in, the competition increases. It is the competition of the new firms that forces prices and profits down, thus increasing the efficiency of the total economy. It is interesting that profits encourage the very competition that keeps profits in check.

The inherent signals coming from the components of prices, profits, losses, and wages, determine not only which industries continue to exist but also which products survive. Only profitable industries, firms, and products survive. That also makes for a more efficient economy.

• Losses: The concept of losses plays an equally important role in sending signals to the economic marketplace. Businesses must match their production choices with the consumer choices or face losses and eventual bankruptcy. In the system, profits seem to be the rewards and losses seem to be the pain. But in the long haul, even the pain of the losses serves to bring about rewards. Losses send the signal that something must change because the natural resources are not being used for the highest and most efficient means.

Just as high profits in a certain industry will send signals for new businesses to get involved in the same activity, so also do losses send a strong signal for others to pack up and get out. Those negative signals are strong and equally important.

When a business incurs costs that exceed profits, it is in trouble. It is time for it to change its approach and use its resources some other way. That is a hard lesson to learn. But failure in a business simply means that the business is not making other people better off. When that failure occurs, the resources that the business was using can now be used for other purposes. Other managers can now have a go at managing those resources. It is hoped that they will be successful in making people better off, and, as a result, make a profit from redirecting those resources.

 It is important that we ask why some countries are wealthy and others are not. It is likewise important to ask why some countries were wealthy and are presently becoming less wealthy. It is important to investigate at what level the individuals of a country are presently experiencing cultural and economic freedom as they access a country’s natural resources. It is still important to observe if the individuals are allowed to generate higher incomes by creating new wealth to be enjoyed by themselves and their countries.

Let’s keep observing and asking questions. Let’s keep discovering!

Next Week: Wages

          (Research ideas from Dr. Jackson’s new writing project on Cultural Economics)

© Dr. James W. Jackson   

Permissions granted by Winston-Crown Publishing House

www.drjameswjackson.com   

Dr. James W. Jackson often describes himself as "The Happiest Man in the World." A successful businessman, award-winning author and humanitarian, Jackson is also a renowned Cultural Economist and international consultant, helping organizations and governments to apply sound economic principals to the transformation of culture so that everyone is "better off."

As the founder of Project C.U.R.E., Dr. Jackson traveled to more than one hundred fifty countries assessing healthcare facilities, meeting with government leaders and "delivering health and hope" in the form of medical supplies and equipment to the world's most needy people. Literally thousands of people are alive today as a direct result of the tireless efforts of Project C.U.R.E.'s staff, volunteers and Dr. Jackson. 

To contact Dr. Jackson, or to book him for an interview or speaking engagement: press@winstoncrown.com