Monday, May 18, 2009

Adam Smith, Union Man

Memo to the Washington insiders who have been shying away from Card Check (a.k.a. the Employee Free Choice Act—the bill that would make it possible for workers to vote to join a union by simply filling out a form): Adam Smith, the founding philosopher of the free market, would probably have supported it.

Smith was not afraid of high wages. In Wealth of Nations, his classic outline of capitalist principles that was published in 1776, Smith made it clear that astronomical profits are a much greater contributor to high prices than rising wages. "In reality," he wrote, "high profits tend much more to raise the price of work than high wages."

Here’s his argument, updated: if all the workers making minimum wage (currently $6.55 an hour, and set to rise to $7.25 in July) at a busy D.C. deli want to unionize in order to gain a dollar more per hour, it’s easy to determine what that would cost consumers. Simply multiply the number of laborers times the number of hours they work each day and divide by the number of items they produce. If five employees sell 50 sandwiches each in an eight hour shift, that 15 percent bump in wages would cost customers just 16 cents per tuna melt—a mere 2.3 percent bite on a sandwich that previously sold for $6.95.

By contrast, if the deli owner wants 15 percent more in profits, those same sandwiches would jump to $7.99—$1.04 more. And if the owner and the distributor he buys from both want 15 percent more, the price of a deli sandwich would jump to $9.19—15 percent compounded on top of 15 percent.

"Our merchants and master-manufacturers complain much of the bad effects of high wages in raising the price, and thereby lessening the sale of their goods both at home and abroad," Smith wrote. "They say nothing concerning the bad effects of high profits. They are silent with regard to the pernicious effects of their own gains. They complain only of those of other people."

The self-interest of laborers, Smith wrote, is "strictly connected with the interest of the society." By contrast, the self-interest of "those who live from profit" is murkier. The rate of profit, Smith noted, is "naturally low in rich, and high in poor countries, and it is always highest in the countries which are going fastest to ruin."

Smith's conclusion? Capitalists are "an order of men, whose interest is never exactly the same with that of the public, who have generally an interest to deceive and even to oppress the public, and who accordingly have, upon many occasions, both deceived and oppressed it."

Which is why—and this is key for consideration of Card Check—he strenuously urged that policy pronouncements from big business and its shills—the folks who are now crying that the Employee Free Choice Act violates democratic principles—"ought always to be listened to with great precaution, and ought never to be adopted till after having been long and carefully examined, not only with the most scrupulous but with the most suspicious attention."

Smith didn’t specifically say that unions were a benign influence. But he understood that giving workers a better deal was an economic stimulus: "The wages of labour are the encouragement of industry, which, like every other human quality, improves in proportion to the encouragement it receives."

Reading Smith is revelatory. Our popular assumption about the unfettered pursuit of profit—that it is the world’s greatest method for providing for all people—turns out to be a misreading of the capitalist sage. Here’s a key statement: "In a country which had acquired its full complement of riches, where in every particular branch of business there was the greatest quantity of stock that could be employed in it, as the ordinary rate of clear profit would be very small, so the usual market rate of interest which could be afforded out of it, would be so low as to render it impossible for any but the very wealthiest people to live upon the interest of their money."

Having enough goods to satisfy every person’s every need, then, would cause profits to droop and interest rates to tumble. So, if the profit motive is paramount, as Smith insisted it is, a businessman should never try to satisfy all the demand for his or her product. That’s why it’s not in the interest of real estate developer to have lots of apartments and homes available—because that lowers rents and purchase prices. And it never behooves grain dealers to market enough rice to feed the world’s starving—because the price per pound would sink into the paddies. Wise capitalists, in short, seek sufficient scarcity to support a high price, and uncontrolled capitalism is unlikely to provide for the needs of all people.

Smith was unconcerned about this. He saw the self-regulating market not as a mechanism for individual riches, but as a system that would provide for the overall well-being of countries. That’s why he called his book Wealth of Nations (the full title is An Inquiry into the Nature and Causes of the Wealth of Nations) and not simply Wealth. For Smith, the "invisible hand" of the market would naturally bring this about.

Surveying today’s crippled auto industry and the bailed-out banks with their bloated swill of credit default swaps and collateralized debt obligations, many have come to see Smith’s invisible hand as mythical, fictional and delusional. Card check and other appropriate regulations offer a blueprint for creating the stable, healthy, well-educated and well-off populace that is the true wealth of nations.


Ori Pomerantz said...

By contrast, if the deli owner wants 15 percent more in profits, those same sandwiches would jump to $7.99—$1.04 more.

Sorry, but that's bad math. This is a 15% increase in sandwich price. But the price doesn't all go to the owner's profit.

Based on your own figures, out of every sandwich $1.048 goes to salaries. Even if the bread, tuna, and rent were free, the owner's profit would be $6.95-$1.048=$5.902. 15% of that is approximately $0.88. And in the real world, bread, tuna, and rent cost money.

rn said...


Thanks for pointing out my loose wording. I'd wager, though, that in most cases, even controlling for bread, tuna, and rent, a 15 percent increase in profit would raise the price more than a 15 percent increase in wages would.