Capital and legislation
by Ari Armstrong
The following article originally appeared at Boulder Weekly on January 26, 2006.
Are free markets fundamentally responsible for our quality of life or is social legislation? In a thoughtful letter published last month, Ken Kinder takes issue with one of my columns. I had written, "[O]ur short work weeks, long vacations, pleasant conditions and high wages are the consequence of one and only one phenomenon: increased capitalization developed over many years in relative economic freedom."
Kinder summarizes information reviewed by Howard Zinn: "In 1938, Congress passed the Fair Labor Standards Act which established a national minimum wage, the 40-hour work week, overtime pay, and banned exploitation of children. It followed a 1935 law, The National Labor Relations Act, which guaranteed American workers the right to organize."
Kinder concludes that "every one of our workplace rights and protections was won either by an act of Congress or organized labor, not by 'increased capitalization development' (whatever that means)."
I did explain that capital includes the "factories, machines, education, etc.," that allow us to produce more goods and services in less time. For example, if you're stranded stark naked on a desert island with no man-made materials, you have zero physical capital. But then, assuming you can find enough food to survive, you will begin to make spears and nets for fishing, knives for cutting open coconuts, and so on. That's primitive capital.
In our advanced economy, capital consists of electric power plants and lines, office buildings, factories of all kinds, cars and airplanes and railroad lines, computers, and on and on. Because we have so much capital, we're able to produce enormous wealth to sustain and improve our lives. The average American worker today can produce dozens of times more wealth in a given time period than the average worker could produce 300 years ago.
Andrew Bernstein summarizes in The Capitalist Manifesto, "Prior to the industrial revolution, living standards in Europe were generally as low (or lower) than in the poorest regions of the Third World today. Famine, filth, plague and extreme destitution were the norm and had been for centuries."
Is it possible to legislate more wealth into existence? It is true that the rule of law to protect property rights is necessary for the formation of capital. People won't invest their time, resources, and wealth to create capital when they think it will be stolen from them. However, obviously, you cannot produce more wealth merely by passing legislation. You have to increase productivity, which means that you have to create more capital.
When workers create more wealth in the same period of time, owing to the increase in capital, then real wages increase.
If it's possible to increase wealth merely by legislation, then why don't we just pass a law that sets the minimum wage at $100 an hour, or $1,000 an hour?
While many texts refute Kinder's conclusion, I'll quote from Ludwig von Mises, the master economist of the 20th century. He writes in Human Action, "The history of capitalism in Great Britain as well as in all other capitalist countries is a record of an unceasing tendency toward the improvement in the wage earner's standard of living. This evolution coincided with the development of pro-labor legislation and the spread of labor unionism on the one hand and with the increase in marginal productivity of labor on the other hand."
So which is the driving force? Mises points out that it is the "increase in the per capita quota of capital invested."
Moreover, economic legislation actually hurts workers: "As far as labor legislation and union pressure did not exceed the limits of what the workers would have got without them as a necessary consequence of the acceleration of capital accumulation as compared with population, they were superfluous. As far as they exceeded these limits, they were harmful to the interests of the masses. They delayed the accumulation of capital thus slowing down the tendency toward a rise in the marginal productivity of labor and in wage rates. They conferred privileges on some groups of wage earners at the expense of other groups. They created mass unemployment and decreased the amounts of products available for the workers in their capacity of consumers."
Advocates of free markets recognize the right to assemble freely without suffering or initiating violence; what Mises is talking about is legislation that gives unions special powers over businesses, powers backed by police force. John Stossel recently wrote about the New York transit strike, arguing that strikes should not be banned by the state. He adds, "Of course, just as workers have a right to strike, employers -- morally, at least -- have a right to fire them."
So where do the fallacies that Kinder voices come from? Earlier advocates of Kinder's ideas, Mises writes, "were guided by the popular fallacies concerning governmental omnipotence and the alleged blessings of labor unionism," driven further by "a fanatical dislike of the market economy and an enthusiastic endorsement of the doctrines of socialism and interventionism."
As Kinder suggests, this debate is crucial to our understanding of globalization today. Unfortunately, those Americans who remain ignorant of (or ideologically blinded to) the crucial role of capital formation in the rise of real wages, and who denigrate free markets and praise interventionism, threaten to harm the poorest people in the world, who desperately need economic liberty.