Thoughts about equitable wages

I must have done something right in my last blog post because somebody finally commented and disagreed with what I said. I’m glad to see that people are still reading the blog and thinking about what I’ve said. Keep those comments coming!

So, because I thought Stephanie’s comments on my last post deserved a fuller reply than would fit nicely into the comments section, I’m going to take the chance to respond to what she said. First, her comment:

I have to disagree with you on one of your underlying premises. I don’t believe that the wealth large business owners and investors accumulate is deservedly theirs. If all employees were paid an equitable wage and the product was priced right, business owners would not make huge amounts of profit. The basic premise that someone deserves millions of dollars for their idea and that their work is worth more than others is a faulty premise. The employee that carries out the ideas of the owner should be making similar wages, in my opinion. If a company is making millions of dollars, then the item is overpriced and the price should be reduced in order to increase everyone’s well-being and avoid the huge discrepancies in lifestyles that currently exist.

There are several underlying presumptions here; I’ll address two of them. I’ll also point out that I’m borrowing ideas liberally from Hayek’s The Road to Serfdom here; his chapters “Planning and the Rule of Law”, “Who, Whom”, and “Security and Freedom” have much more detailed analysis of the basic presumptions of Stephanie’s questions than I’m giving here.

And before I begin, some additional disclaimers. This post is shorter than I’d like it to be. It’s not a complete answer to Stephanie’s objection. I have other thoughts on this subject that I haven’t included here. I make assumptions that I don’t fully explain or explore. I might change bits of my position in later posts.

All that’s ok, because we’re having a conversation. So, here goes:

Business owners don’t deserve their wealth.

As I’ve said before, I’m committed to the free market. Four primary principles undergird that commitment. First, a society interested in maximizing its citizens’ welfare must operate by the rule of law. Second, that society must allow individuals the greatest degree of individual liberty possible. Third, that society must hold its citizens responsible for the consequences of their actions. And fourth, that society must respect the ownership of private property.

So I look at the question whether a business owner deserves his wealth very simply. Each of the principles above is important here: if we are to respect the ownership of private property and to encourage the exercise of individual liberty, we must allow reasonably intelligent parties to bargain for what they want. Assuming the rules of law effectively prohibit coercion and dishonesty in any private transaction, I must conclude that each party to a transaction deserves to own what he bargained for because the other parties willingly traded with him.

Therefore, if a business owner manages to trade enough of his “things” (money, time, assets, knowledge, etc.) to accumulate wealth without coercion or deceit, it follows that he deserves to own that wealth as a natural consequence of the parties’ choices.

Granted, some business owners lie and cheat and steal. But to say that those business owners don’t deserve their wealth is not the same thing as to say all business owners don’t deserve their wealth.

There is an “equitable wage” which can be determined without regard to the market and which employees should be paid.

Hayek addresses this issue really well. Basically, the question is “how are we to determine what is an equitable wage?” If you begin with the premise that the market fails to determine an equitable wage, it’s quite natural to conclude that some other entity—a bureaucrat, a committee, or some other authority—ought to determine what an equitable wage is.

But the problem with the idea of an “equitable wage” is that it assumes its own conclusion. People who talk about equitable wages already don’t accept the idea that the market approximates a fair wage. Once you accept the premise that the market doesn’t actually dictate a fair wage, you have to look to some other source to find it. It therefore becomes the province of a third party to determine what is “fair” in any transaction. And because each transaction affects several other transactions in such a way that all transactions are ultimately related, it becomes necessary to determine what is fair in every transaction, which requires centralized economic planning.

But in ceding the power to a central planner to determine what is fair or equitable, we would violate the principle that holds us accountable for our own decisions. And because there’s a very real likelihood that I don’t want to make a bargain on the terms set by the third party, it also becomes necessary to coerce me into accepting the transaction (or a given job), violating both the prohibition against coercion and the principle of maximizing individual liberty.

At the risk of invoking Godwin’s Law, what we are describing is socialism. And because socialism requires the violation of these basic principles, I simply can’t prefer its centrally-planned economy to a free market based economy.

Hayek also points out that socialism can’t actually deliver a perfectly equitable wage in the sense of a completely equal wage for each individual in society. At its best, socialism promises “a more just and equal” distribution of wealth. “Not equality in the absolute sense, but ‘greater equality’ is the only goal which is seriously aimed at.”

To my mind, that’s not a bargain worth making. I’ll take the risk of the market if it means preserving my economic freedom. If I’m economically free—if I’m free to make any bargain I want so long as I don’t violate basic principles like “don’t lie, don’t steal, and don’t coerce others”—then I’m free to decide I won’t do any work on the Sabbath because God commanded me not to or to decide that I won’t produce military ordnance because I’m a conscientious objector or to decide that I’m going to pay my employees three times the market wage for their kind of work because I think the market wage is simply too low.

No such freedom exists in a centrally-planned economy. And so whatever socialism is, it’s not better than capitalism.