A Journal for Western Man-- Issue VIII
Dr. George Reisman
11) I turn now to the subject of monopoly. Socialism is the system of monopoly. Capitalism is the system of freedom and free competition.
As Mises has pointed out, the essential nature-given requirements of human life, such as drinking water, arable land, and the accessible supplies of practically all minerals are typically available in quantities so great that not all available sources can be exploited. The labor that would be required is not available. It is employed on pieces of land and mineral deposits that are more productive or in the numerous operations of manufacturing and commerce, where its employment is demonstrated by market prices to be more important than the production of an additional supply of agricultural commodities or minerals.
In these conditions, and in the absence of government interference, what is required to enable any producer (or combination of producers) to become the sole supplier of anything is that the price he charges is too low to make it worthwhile for other potential suppliers to enter the field. The position of sole supplier is secured by lowness of price, and is not the basis for imposing a high price.
The same essential point applies to cases in which the necessity of investing large sums of capital sharply limits the number of suppliers. Here a large capital is required in order to achieve low unit costs of production, which are necessary in order to be profitable at low selling prices.
Monopoly is actually the result of government intervention. Specifically it is the reservation of a market or part of a market to one or more suppliers by means of the initiation of physical force. Exclusive government franchises, protective tariffs, and licensing laws are examples.
12) Capitalism is a system of progressively rising real wages, the shortening of hours, and the improvement of working conditions. Contrary to Adam Smith and Karl Marx, businessmen and capitalists do not deduct profits from what allegedly was originally all wages or what allegedly is naturally and rightfully all wages. The original and primary form of income is profit, not wages. Manual workers producing and selling products either in Adam Smith's "early and rude state of society" or in Karl Marx's "simple circulation" did not earn wages, but sales revenues. When one sells a loaf of bread or a pair of shoes, or any other product, one is not paid a wage but a sales revenue. And precisely because those manual workers did not behave as capitalists, i.e., did not buy for the sake of selling but made expenditures merely as consumers, they made no expenditures for means of producing whatever goods they may have sold, and thus they incurred no money costs to be deducted from their sales revenues; i.e., the full magnitude of their sales revenues was profit, not wages. Profit, it turns out, is the original and primary form of labor income.
Contrary to Adam Smith and Karl Marx, it is only with the coming of capitalists and the accumulation of capital that the phenomenon of wages comes into existence, along with the demand for capital goods. Both wages and the expenditure for capital goods show up as money costs of production which must be deducted from sales revenues. The more economically capitalistic the economic system, in the sense of the greater is the buying for the purpose of earning sales revenues, relative to sales revenues, the higher are wages and other costs relative to sales revenues, and thus the lower are profits relative both to sales revenues and to wages. In other words, what capitalists are responsible for is not the creation of the phenomenon of profit and its deduction from wages, but the creation of the phenomena of wages and money costs and their deduction from sales revenues, which were originally all profit. Capitalists are responsible for the creation of wages and the reduction of the proportion of sales revenues that represents profit. The more numerous and the wealthier are capitalists, the higher are wages relative to profits.
The fact that wage earners may be willing to work for minimum subsistence, in the absence of any better alternative, and that businessmen and capitalists, like any other buyer, prefer to pay less rather than more, are propositions that are true but utterly irrelevant to the determination of the wages that the wage earners must actually accept. Those wages are determined by the competition of employers for labor, which is both the most fundamentally useful element in the economic system and is intrinsically scarce.
In that competition, it is against the self-interest of any employer to allow wage rates to go below the point corresponding to the full employment of the kind of labor in question, in the location in question. Such low wage rates mean that the quantity of labor demanded exceeds the supply available, i.e., that there is a shortage of the labor concerned. A shortage of labor is comparable to an auction in which there are still two or more bidders for one and the same item. The only way that the bidder who wants the item the most can secure it, is by outbidding his rivals and making the item too expensive for them, so that they must step aside and make it possible for him to secure the item.
In the labor market there may be tens or even hundreds of millions of workers. But the scarcity of labor means that there are potential jobs for far more than that number. The fact that each of us would like the benefit of the labor of at least ten others can be taken as an indication of the extent of the scarcity of labor.
When a wage rate goes below the point corresponding to the full employment of the kind of labor concerned, it becomes possible for employers not able or willing to pay that higher rate to obtain labor at the expense of other employers who are able and willing to pay that higher rate. The situation is exactly the same as the stronger bidder at an auction who is faced with the loss of the item he wants to another, weaker bidder. The way to secure the labor he needs is to raise the bidding and knock out the competition of the weaker employers.
In the face of labor shortages, which appear when ceiling prices are imposed on labor, employers actually conspire with their employees to evade the spirit of the wage controls, by giving out phony promotions. This enables them to claim that they are not violating the controls when in fact they are.
Now, given the height of money wage rates, which we have seen is determined by the competition of employers for scarce labor, what determines real wages, i.e., the goods and services that the wage earners can buy with the money they earn, is prices. Real wages are determined fully as much by prices as they are by wages. Real wages rise only when prices fall relative to wages.
What makes prices fall relative to wages is a rise in the productivity of labor, i.e., the output per unit of labor. A rise in the productivity of labor means a larger supply of consumers goods relative to the supply of labor, and thus lower prices of consumers' goods relative to wage rates. If we could somehow measure the supply of consumers' goods, a doubling of the productivity of labor would operate to double the supply of consumers' goods relative to the supply of labor and, in the face of the same overall respective expenditures to buy consumers' goods and labor, result in a halving of the prices of consumers' goods in the face of the same overall average wage rates. In other words, it would double real wage rates.
The rise in the productivity of labor is always the essential element in the rise in real wages. It is what enables increases in the quantity of money and volume of spending, which are responsible for higher average money wages, being accompanied by prices that do not rise or do not rise to the same extent as wages.
And what is responsible for the rise in the productivity of labor is the activities of businessmen and capitalists. Their progressive innovations and capital accumulation underlie the rise in the productivity of labor and thus in real wages.
13) Finally, my last point: a one-hundred- percent-reserve, precious-metals monetary system would make a capitalist society both inflation-proof and deflation/depression-proof. The modest increase in the supply of precious metals, and thus the modest rate of increase in the volume of spending that proceeds from it, would not be able to raise prices in the face of the substantial rate at which the production and supply of practically all goods other than the precious metals increases under capitalism. Prices would most likely tend to fall, as they did over the course of the Nineteenth Century.