Friday, August 23, 2013

The ‘Purchasing Power’ Theory

The CIO argument for another general wage increase of 25 percent has caused such deep concern not merely because the statistics on which it is based are so misleading but because the policy the labor organization advocates is a threat to the survival of the free-enterprise system itself.

In the period 1929 to 1945, wages and salaries averaged 69.6 percent of the national income. Corporate profits averaged 4.9 percent. After allowing for wages from non-corporation sources, a 25 percent increase in wages, without any increase in prices, would wipe out corporate profits several times over.
The CIO will no doubt answer that this does not apply today because corporate profits are now so “fantastically high.” As George Terborgh has shown, however, corporate profits, even on the high guess of Robert Nathan, are today actually lower in relation to the national income than in any other full-employment, peacetime year on record.

Here is a fact that will repay contemplation. The last sixteen-year period, two-thirds of which was a period of mass unemployment, and the rest of abnormal profit taxation, has led us to forget what level of corporate profits, in relation to the national income, has been normal with full employment. The thesis of the CIO seems to be that high profits mean depression and low profits prosperity. The statistics show the precise opposite. Full employment goes with high profits, and mass unemployment with low profits or deficits.

From 1929 to 1945 the years of highest profits were the years of highest employment, the years of lowest profits the years of lowest employment. When corporations as a whole took a loss, in 1931, 1932, and 1933, we suffered the greatest mass unemployment in our history. The year in which labor got the greatest percentage of the national income it has ever had was 1932. From 1909 to 1929, the lowest profits came in 1921, the year of greatest depression and unemployment. A dozen of the 21 years from 1909 to 1929 were years of substantially full employment. In those dozen years the average ratio of corporate profits to national income was not 5 percent, but 9.75 percent.

The statistical case for the CIO purchasing-power theory, in brief, is simply nonexistent. The chief of the many fallacies on which the CIO purchasing-power theory rests is that of mistaking consequences for causes. It is true that when production is highest, real income is highest and real purchasing power is highest (though these must not be confused with income or purchasing power stated as monetary totals without allowing for price levels). But that is because production, real income, and real purchasing power are, in effect, three names for the same thing.

It does not follow that we can invoke or perpetuate prosperity merely by raising wage rates above their existing level, whatever it may happen to be. Even if this step had the first results that the purchasing-power theorists suppose, it would obviously deduct as much from the purchasing power of investors, employers, and all other groups in the nation who normally contribute about 30 percent of its purchasing power, as it would add to the purchasing power of labor.

But such a step does not have even the first results that the purchasing power theorists imagine. If the wage increase is confined to the strong unions, it forces an increase in the prices of what these unions make. That means a rise in the living costs, and a corresponding decline in the real purchasing power, of all other workers. If the wage increase is general, it must force a general increase in prices that cuts back the real purchasing power of everyone, including the workers who have received the increase. This rise in prices discourages buying, and therefore produces a contraction in production and employment. If, finally, an attempt were made to take the wage increase entirely out of profits, as the present CIO program contemplates, marginal producers would be thrown immediately out of business. Mass unemployment would once more be upon us.

That is why the present CIO plan is the most dangerous anti-labor program that has ever been proposed. What we need are the particular wage rates and prices that will encourage the highest possible employment, payrolls, production, and sales. These equilibrium wage rates and prices can be found only by free markets.

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