Submitted by James E. Miller of Mises Canada,
In America, and to a certain extent in Canada, rich businessmen are seen as savvy at their craft. After building an empire of wealth, it’s hard to challenge a successful person’s view of market economies. Business owners have to make payroll and navigate through government regulations. They have firsthand experience with the ins and outs of making sure consumers are satisfied. Driven by profit, they have little need for onerous tax collectors and do-goody bureaucrats standing in the way. Therefore, when an affluent businessman speaks, his word is typically taken as the unvarnished truth.
Things are not always that straightforward however. Not every capitalist prefers capitalism. Not every entrepreneur wants a free market. Not every Ayn Rand-like figurehead wants the government to adhere to strict and limited principles.
That’s exactly the case in a recent Politico Magazine article penned by Seattle investor Nick Hanauer. Titled “The Pitchforks are Coming…For Us Plutocrats,” the piece is written exclusively to the “.01%ers” who aren’t too busy from their day job to read the webzine version of a political gossip hub. What I mean to imply is that the article isn’t written for men and women who have their hands full putting billions of dollars to work in the economy. It’s written as a self-assurance tract for progressives who want to justify their “eat the rich” hankerings.
Hanauer starts out by hammering on the favorite trope of all leftists: inequality. He points out that a few decades ago “the top 1 percent controlled about 8 percent of U.S. national income” while the “bottom 50 percent shared about 18 percent.” Now in 2014 he claims, “the top 1 percent share about 20 percent; the bottom 50 percent, just 12 percent.” With this kind of divergence in wealth ownership, it’s just a matter of time before the people on the bottom rise up and reclaim what’s theirs. Hanauer writes that it’s impossible for society to “sustain this kind of rising inequality.” Before long, “the pitchforks are going to come for” him and his fellow super rich.
Now there is certainly a case to make that much of the economic inequality we have is unjustified. When governments dictate large portions of the economy, much as they do now, it has the effect of cementing the politically-connected on top. Small businesses and entrepreneurs have a more difficult time breaking into the marketplace when big players can keep them out via state mandates. The big banks, auto companies, large department stores, and software companies with loads of patents all take advantage of the government’s legal use of force to suppress competition. Their profits go up as a function of not necessarily satisfying consumers, but by not having to innovate as much.
Hanauer addresses none of this. He goes into the great need for the wealthy to start working with the government to chisel down the difference between the haves and have-nots. One recommendation he makes is for the moneyed to adopt the approach “Franklin D. Roosevelt did during the Great Depression” in order to help the middle and lower class. The idea that FDR was a boon to the poor is, of course, fiction. Roosevelt’s capricious New Deal regulations did nothing to cure the Depression; rather they elongated the downturn for over a century. Not only that, but the fascist cartelization of the economy through the National Industrial Recovery Act restricted many small businesses from even getting off the ground. There was also the blatantly racist housing policies that purposefully created inner-city ghettos by diverting tax subsidies away from urban centers.
In true ignorant fashion, Hanauer addresses none of the unintended consequences of government economic regulation and goes right for a direct solution: forcefully raising wages. He isn’t alone in this crusade. Large companies like Wal-Mart and McDonald’s have already embraced raising the minimum wage for putatively humanitarian reasons. Hanauer is just going off of their lead, and advocating for the Henry Ford approach to selling cars. The myth goes that Ford paid his employees an exorbitant, unprecedented wage – $5 a day back in 1914 – so that they, too, could afford the cars coming off the assembly line. This wage policy decimated Ford’s competition. He could afford to pay wages his competitors could not. This boost in take-home pay attracted better talent, which in turn lead to more production, and thus more profit.
The business approach was not meant to last however. When the Depression set in, Ford attempted to pay his employees at least $7 an hour. Instead of increased orders, the number of cars purchased fell. Employees ended up accepting lower wages and fewer work hours. Ford blamed company owners who only emphasized “profit motive” over wages. His reasoning was nonsense; if simply paying your employees more ensured higher employment and purchasing power, his original solution would have worked. Instead, the opposite occurred. Once again, one of America’s premier capitalists had the rules of economics completely backwards.
As Henry Hazlitt wrote in Economics in One Lesson, the logic behind the “enough to buy back the product” practice is completely flawed. The promoters of the purchasing-power theory, such as Mr. Hanauer, can’t expect “the makers of cheap dresses should get enough to buy back cheap dresses and the makers of mink coats enough to buy back mink coats.” In modern terms, it can’t be enough for the baristas at Starbucks to make enough to buy a $2 cup of coffee. They have to want something more. The only way Ford’s train of thought works is for everyone to work in industries that produce expensive goods.
In a clever move of obfuscation, Hanauer cites the growth of small business payroll in Seattle and San Francisco – two progressive paradises with the highest minimum wages in the country – to back his claim that higher government-mandated wages boost job creation. What he either forgets or purposefully hides is the effect of large businesses like Microsoft, Amazon.com, Wells Fargo, Google, and Twitter that are all headquartered in both cities. These businesses aren’t paying their employees a wage slightly above the minimum threshold. They’re doling out big salaries because of their ability to produce cutting-edge products and please consumers. The rise in small businesses around these industry giants is a result of the latter’s success – not the other way around.
If Hanauer really wants to test out his theory, I propose this to him: shed your billions of dollars and give the money directly to your employees. Drain your bank accounts and give the proceeds to the spend-happy middle class. If consumer demand truly grows the economy, then the profits will come roaring back. There will be no time gap between having to adjust capital investment to make sure goods reach store shelves. There will be no inability to purchase raw materials or pay employees while waiting for the finished product to hit the market.
As any basic economics student will tell you, that’s all patent nonsense. There is not getting around the fact that if you raise the price of labor, you will get less of it. Demand curves always slope downward. The minimum wage is always a creator of unemployment, no matter how many entrepreneurs or business owners say otherwise. Hanauer is right that economic inequality can create resentment. But he doesn’t see the real culprit: a government that insists in meddling in the marketplace. His solutions don’t fix the problem; only exacerbate it.