June 19, 2013
You Need a Raise
Posted on May 31, 2010
By Moshe Adler
Bon Jovi charges $1,875 for a front row seat and fan Jim Leaman bought a ticket. “I have money,” Leaman told The New York Times, “and I don’t care if it costs $100 or $1,000.” But is it his money?
Leaman apparently makes his money from a propane distribution company that he owns. Of course, Leaman does not produce propane. By himself, he most likely does not produce anything else either. Such a company no doubt employs workers who fill the propane bottles, phone operators who take orders, technicians who maintain the equipment, forklift operators who load the bottles on trucks, drivers who distribute them to customers, and a manager who coordinates these activities.
The bottling and distribution of propane is a team effort, as is the production of almost everything else. A bus driver and a bus may deliver 40 passengers, but the driver without the bus would deliver no passengers, and neither would the bus without the driver. A surgeon operates on a patient who was prepped for surgery by others; she uses tools that were sterilized and are handed to her by nurses who also operate machines without which the surgery would not have been possible. The team that produces a high-rise is bigger still.
How is the income that a team generates divided among the members? In 1776, Adam Smith explained that the factor determining how income is shared is bargaining power, and that this power consists of the ability of each side to hold out for a better deal and to harness the support of the government. On both accounts the employers are stronger: First, they are richer, and, therefore, “in all such disputes, the masters can hold out much longer.” But the government also sides with them: “The masters ... never cease to call aloud for the assistance of the civil magistrate, and the rigorous execution of those laws which have been enacted with so much severity against [the unions] of servants, labourers, and journeymen.” A third factor that determines bargaining power is, of course, the availability of replacement workers. When several workers compete for the same job, and these workers are not protected either by a minimum wage law or a union, masters once again have the upper hand.
If the owner of a business takes for himself a large enough share of the income of the team that he can afford $1,875 concert tickets without thinking twice, isn’t it fair to ask whether the money is justly his? In the latter part of the 19th century, workers raised this very question. The government responded with violence: Workers were killed and labor leaders hanged—the Haymarket Massacre was one of those events. John Bates Clark, a Columbia University economics professor, responded by denying the validity of the question itself. Had the question been valid, Clark explained, workers would have been justified in rebelling:
But the question was not valid, Clark argued, because production is not carried out by teams, and power does not determine rates of pay.
If not by teams, how is production carried out, then? Each worker and each machine produces all by itself a small quantity of product, Clark argued. An employer adds workers one by one, each time comparing the value of the product of the additional worker to the wage. The process of adding workers stops when the value of the additional product is just the same as the additional wage that this worker will earn. Since workers are interchangeable, each worker can be regarded as the last worker hired, and hence each worker gets paid the value of what she adds to production.
The only problem with this description of the production process is reality. A bus and its driver produce an income of $100,000, and the wage of the bus driver is $25,000. Is it because the driver without the bus transported 10 passengers and the bus without the driver transported the other 30? Production is carried out by teams, and this is why individual contributions, of either workers or machines, cannot be measured.
Finding an example of a production process that does not involve a team is nearly impossible. Every restaurant, grocery store or construction site is an example of team production. In the face of this obvious reality, how is it possible that generations of economists have been brainwashed into believing that each person is paid “what she is worth”? It has taken the current Great Recession to shake the hold that this view has had on both academic and public discourse about how wages and executive compensation are determined. The opportunity is now here to have theories that are based on the real world.
In reality, production is carried out by teams, and the income that this production generates should be divided among the members fairly. Two laws would facilitate this greatly: One would set a ratio between the highest and lowest rate of pay in any firm or corporation, and the other would set a ratio between the pay of labor and the pay of the owners of the corporations who provides labor the machines and structures that it works with.
We need laws that help us fairly divide what we produce as teams.
This article is based on Moshe Adler’s book “Economics for the Rest of Us: Debunking the Science that Makes Life Dismal” (The New Press). The book just won an IPPY (Independent Publisher Book Awards) Gold Medal.
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