Myth: Unregulated capitalism does not exploit workers.
Fact: Without a wage floor, unemployment will drive entry-level wages below the poverty level.
Entry-level workers do not usually agree to their wages; they take whatever is offered. This is because there are more workers than jobs in the economy, and workers are in competition for those jobs -- the alternative is starvation. Employers often take advantage of this to let wages fall as low as they can get away with and still meet their needs. Allowing such a trend has historically resulted in greater income inequality. (The top half of the labor market operates by different dynamics from the bottom half.) Researchers have produced a broad body of evidence that higher levels of inequality are correlated with higher mortality rates. Thus, this sort of exploitation is deadly, and a violation of the right to life. Democratic government can stop this trend by regulating capitalism (through minimum wage laws, for example) and creating progressive taxes. Labor unions are an even more effective method in solving the destructive competition between individuals seeking jobs.
Before we can prove that unregulated capitalism naturally results in exploitation, we have to define what exploitation is. There are many definitions, but for our purposes here it is whenever Person A unfairly uses Person B to accomplish Person A's selfish ends. The central issue, of course, is what constitutes "fair" and "unfair" use.
This is a rather complex question, one that has inspired scholars to write volumes of moral philosophy and logic trees. As a result, there are many ways to argue against the far-right position that unregulated capitalism doesn't exploit, but perhaps the simplest way is to agree to all their premises and then show how unregulated capitalism fails to deliver the goods.
Their basic premises are generally as follows: everyone has a right to life, liberty and property. However, these are negative rights, not positive rights. That is, I cannot force you to give up anything so that I may enjoy life, liberty or property; I merely have a right to earn these on the free market. All exchanges should be voluntary and uncoerced.
Does unregulated capitalism deliver justice under such a paradigm? Not at all. To see why, let's consider the following analogy:
Suppose that you are shipwrecked on a deserted island, which has a small patch of vegetation that bears enough food to feed you (and several others, if need be). After a year, a second person becomes shipwrecked on the island, but you have somehow managed to establish control of the only food source, and are able to deny its use to the newcomer. When he objects that he is starving to death, you counter-argue that he has no right to make positive claims on your property. But is your refusal a violation of his right to life? Of course it is.
But suppose he were willing to work for your food. Would you still be violating his right to life by rejecting his offer? Yes.
Now, suppose you took him up on his offer, but you take advantage of the situation to impose cruel terms: in exchange for complete subservience, you give him so little food that he dies of malnutrition in 90 days. In other words, you give him a "choice" of either starving to death now or prolonging it by working for you. Naturally, he will "agree" to his own exploitation. Is this still a violation of his right to life? To be sure. Could we call his freedom of choice truly "free?" Absolutely not, no more than if you held a gun to his head. Notice that the injustice remains even if you give him larger but still insufficient amounts of food, so that he lives only a year, or ten years, or twenty. And all the while suffering from failing health and disposition.
Of course, we should expect a decent person to avoid exploiting others like this, but history tells us nothing if not that human beings are highly self-interested, and all too ready to exploit others when given the opportunity. A prime example is feudal lords exploiting their serfs for fantastic profit. The supreme self-interest of individuals is why we no longer give absolute power to kings or dictators. These observations are entirely consistent with "realism," a political philosophy which is home to most conservatives.
Next, let's suppose a third person becomes shipwrecked on the island, and seeks food. Despite being outnumbered, you still somehow manage to retain control of the food supply, which is more than sufficient for three. Your defenses are quite strong and well designed, and any thought of overthrowing you is completely hopeless. Therefore, you feel safe in announcing that you will share food with the first newcomer only, and allow the second to die. Still wrong? Of course.
Now suppose that you add a refinement to your policy: you don't care which one of the two newcomers will receive the food; you'll simply let them bid for it and award the contract to the one with the lowest bid. As they compete for survival through bidding, they offer greater and greater subservience in return for less and less food. Finally, you accept a bid that will effectively starve one to death in 90 days, and leave the other to starve to death immediately. Still wrong? No question.
And let's add another refinement: both newcomers are unaware or uneducated of the implications of the bidding system you are proposing to them. They happily agree to enter into bidding, and blame their subsequent deterioration of health on the glaring sun, their misfortune of being shipwrecked, or even each other. Does this make the system any more just? Of course not.
But what if you added a system of promotion? Say, you create an apprentice position which causes starvation in a year, and a journeyman position that causes starvation in ten years. Nope still not there yet. Now suppose the island periodically receives newly shipwrecked survivors, and the system grows. To keep downward pressure on their bids, you make sure to keep a few of them unemployed and unfed at all times. But you also add a few supervisor positions that actually offer plenty of food. However, these good jobs form only 25 percent of the total, and due to the pyramid structure of the scheme, 75 percent of the newcomers will be excluded from them by mathematical force. Which is to say, you kill only 75 percent of them. Still wrong?
What if you add income mobility? You rotate all the jobs, so a person spends only 75 percent of his life struggling, and 25 percent in true prosperity. In other words, you kill them off only 75 percent as fast. Still wrong? Notice that this injustice becomes even worse by making this mobility a meritocracy, in which the smartest or hardest working rise to the top, leaving the bottom 75 percent with almost no hope of breaking in.
Adding other features of unregulated capitalism doesn't rescue the system from its basic injustice. Suppose your island economy eventually develops both the tools and technology to cultivate crops on other parts of the barren island, and you put these items and education up for sale (or barter, in this case). Of course, the workers are already starving, so they can't afford it. Only the supervisors will. (This generosity of opportunity is much like the NBA announcing that short people are free to try out for their basketball teams.) When the supervisors strike out on their own, they will create and hoard their own means of production. In other words, they will spread the same bad system to other parts of the island, including the unemployed, the exploited workers, and the well-compensated supervisors.
But doesn't adding competition between owners change things? Don't they compete to offer better wages to workers? Yes, they do but only to the better workers, namely, the supervisors. An owner has only so much he can pay his workforce. If he wants to attract the best workers, it seems more logical to attract them at the supervisor level, not the entry level. (This "logic" is not entirely true, but it is given a major assist by the self-interest of those making these decisions.) Needless to say, the more you pay supervisors, the less you can pay workers. But suppose this strategy works; your talented supervisors increase your production. Don't you have enough now to hand out raises to your workers? There are two possibilities: if your rival stays competitive with you, and makes similarly large salary offers to your supervisors, then the bidding war continues to divert any wage increases away from workers and towards supervisors. But if you bury your competition, then you become a monopoly, and you're back at square one: able to exploit your workers without fear of competition. Notice that this is not a zero-sum argument; it works even when the economy is growing.
What if the tools, education and technology escaped to the masses, and everyone started growing their own crops on their own property lots? Despite overturning the old system, it will naturally reemerge. Why? Because true self-sufficiency is hermitism, which is an inefficient method of survival. It's much more profitable to specialize in a particular job skill and become a member of an interdependent group. But interdependent groups involve an hierarchy of apprentices, journeymen and supervisors. (Try imagining a business operating without someone to coordinate the efforts of its workers, especially in a large, complex operation.) Furthermore, unemployment is a natural feature of economies (Milton Friedman won a Nobel Prize for his discovery of the "natural rate of unemployment.") So the same downward pressure on entry-level wages will reappear, along with the same pyramid scheme of income and power. Back to square one.
The main question in all of this, of course, is why the first person on the island should be given absolute ownership of the property. "First come, first serve" is a terrible policy for property ownership, because it attaches moral significance to one's order of arrival, not to individuals themselves and their labor. Which, the more you think about it, is quite indefensible.
An obvious solution is to remove property ownership from the hands of a few individuals and give it to all individuals. There are a number of ways to do this: one is to make everything public property, to be used freely by all. However, most people object to pure communism on the grounds that it's nice to have a sense of privacy, and they like relying on things to be there when they want them or need them. Pure communism also reduces the incentive to work, since instead of producing what you yourself will use, you can always use what is already in existence and used by someone else.
Another method is to give everyone equal shares. This will involve continually subdividing property for the immigrants and newborns who join the group. (Failing to accommodate these newcomers will only result in the unjust system outlined above.) Continual subdivision is actually the system we use in modern democracies. The entire group owns all the property, and they vote (through representative government) on how this property is to be used. The voters have created a highly liberal system of property use, allowing great deal of personal freedom and privacy in the use of the nation's property. But ultimately it belongs to the government -- something which many people tend to forget. (You may think your property is all yours, because, after all, you own the deed and title. But these documents identify property as recognized by the government.) And the group votes to redistribute this property in the form of taxes, and control it through the passage of laws. Thus, democracy is the antidote to the injustice that occurs under unregulated capitalism.
There are degrees of regulated capitalism, of course. The island economy described above is an extreme example, but by gradually increasing democratic regulation, we can gradually reduce its unjust features. The next question we face is: does the United States really compare to our hypothetical island economy? And if so, by how much?
Exploitation in the United States
Perhaps the first question to resolve is: are some workers under capitalism paid so little that they die early? The answer is a resounding yes: a great many studies have found a significant correlation between income level and mortality rates. (1) In 1986, researchers studied two groups of men between the ages of 25 and 64: those that made less than $9,000 a year, and those that made more than $25,000. They found that poor white men had 6.7 times the death rate of rich white men, and poor black men had 5.4 times the death rate of rich black men. (2) In 1995, the life expectancy for white males was 73.4 years, and for black males it was 65.4 years, eight years lower. (3) Racial differences in homicide and drug abuse rates account for less than two years of this eight-year gap, but even these behaviors are correlated to poverty. (4) And death rates are only the tip of the iceberg; they indicate still broader health problems within a population.
Why are health and life expectancy correlated to income? Perhaps the most obvious answer is that the poor can't afford the same health care. But in fact there are hundreds of reasons why the poor have higher rates of death, disease and injury. The poor live and work in more toxic environments; they have less adequate diets; they are exposed to greater dangers and risks, both human and non-human; they cannot afford the safety features or creature comforts that make living safer or easier; and they have less access to education about things that would extend their lives.
Conservatives object that the poor in the U.S. are better off than the poor elsewhere, and our rising standard of living negates any perceived injustice in these differences. Not so. Two important studies -- one from Harvard, the other from Berkeley -- have found that inequality of income is significantly correlated to mortality rates as well. (5) In other words, it's not just absolute poverty, but relative poverty that also contributes to higher death rates. In a study of all 50 states, they found that that the states with the highest income inequality had the highest death rates (and this was for all age groups, by many different causes). The studies also contained some surprises. Dr. Bruce Kennedy said: "We found that mortality was strongly related to inequality in the distribution of income, but not to the median income or per capita income of a state." (This is also true internationally; the U.S. is richer per capita than Europe, but the U.S. has the highest levels of inequality, hence the highest death rates as well.) Dr. George Kaplan said: "The evidence in these two studies suggests that the increased death rates in those states are not due simply to their having more poor people. Income inequality seems to be increasing mortality rates among nonpoor people as well, and we are investigating that possibility." (6)
Poverty kills millions before their time, and condemns a great many more to diminished lives. If it is indeed exploitation that is causing this, then it is a mass violation of people's right to life. But is exploitation the reason?
The oversupply of workers
In our example of a simple island economy, the property owner was able to exploit by offering only one job to the two survivors, and letting them bid for it. Their resulting competition for lower wages is a perfect example of the law of supply and demand: when the supply of labor is up, prices (or wages) come down. The modern labor market works no differently.
The U.S. keeps an intentional 5-6 percent unemployment rate, part of what Milton Friedman calls "the natural rate of unemployment." Whenever unemployment falls below that, the economy starts "overheating," or developing a bad case of inflation. To combat this, the Federal Reserve tightens the money supply, which lowers inflation but raises unemployment back to 5-6 percent.
What this means is that there will always be more workers than jobs, and workers have to compete for those jobs, accepting lower wages to get them. Of course, most young people who apply for a job at a fast-food restaurant do not enter into hard-nosed wage negotiations with management. Management is so in control of the process that a job applicant often simply accepts whatever management offers, having entered the establishment with a good idea of what to expect.
The oversupply of workers means that the higher the unemployment, the lower the wages. An example of this correlation can be seen in the recession of 1982, when unemployment nearly hit 11 percent in the fourth quarter, and real hourly wages fell nearly 50 cents from three years before. The flip-side to this example is the 1980s "Massachusetts Miracle," when unemployment fell to a phenomenally low 2.7 percent, and McDonald's began offering twice the minimum wage trying to lure seniors out of retirement. (7)
Some people object that this is too simplistic, that the labor market is a complicated place with rapidly shifting demands for rapidly shifting job skills. This is true, although mostly for the top half of the labor market. Take the computer industry, for example. A single renovation like Java can instantly create a labor market for Java programmers and destroy a labor market for obsolete ones. Not anyone can shift into these new jobs; it takes a specially trained experts. This plays havoc with the laws of supply and demand. But the bottom half of the job market is unskilled, and therefore homogenous. Almost anyone can flip burgers or mop floors. The homogeneity of the entry-level work force means that it is highly responsive to the general unemployment rate.
You can see the inverse correlation between unemployment and wages in the following chart. Forget, for the moment, the long-term decline in wages visible from 1973 to today. (We'll get to the reason for that in a moment.) Instead, observe the short-term fluctuations during recession years. Notice that when unemployment peaks sometime around a recession, wages fall. When unemployment gradually starts falling during a recovery, wages rise. This relationship is not exact, but it's close enough to detect a significant correlation. Also notice that this inverse relationship changed in 1985, when another factor began creating an oversupply of workers: the entrance of more Baby Boomers and women into the workforce. Their entrance applied even more downward pressure on wages, despite being in a recovery.
Average hourly wages (constant 82 dollars), unemployment rate, and labor force participation rate by civilian population (8) Avg. Unemp. Labor Year Wage Rate Participation ---------------------------------- 1970 $8.03 5.0% 57.4% 1971 8.21 6.0 56.6 1972 8.53 5.6 57.0 1973 8.55 4.9 57.8 1974 8.28 5.6 57.8 < recession 1975 8.12 8.5 56.1 < recession 1976 8.24 7.7 56.8 1977 8.36 7.1 57.9 1978 8.40 6.1 59.3 1979 8.17 5.9 59.9 1980 7.78 7.2 59.2 < recession 1981 7.69 7.6 59.0 1982 7.68 9.7 57.8 < recession 1983 7.79 9.6 57.9 1984 7.80 7.5 59.5 < upturn in labor participation 1985 7.77 7.2 60.1 1986 7.81 7.0 60.7 1987 7.73 6.2 61.5 1988 7.69 5.5 62.3 1989 7.64 5.3 63.0 1990 7.52 5.5 62.7 < recession 1991 7.45 6.7 61.6 < recession 1992 7.41 7.4 61.4 1993 7.39 6.9 61.6 1994 7.40 6.1 62.5 1995 7.40 5.6 62.9
From 1970 to 1984, you can see wages responding to recessions
and recoveries, with the influx of new workers overwhelming this
relationship after 1985. But what about the long-term decline
in wages? Let's take a closer look at that.
To compensate for falling wages, Americans have been working longer workweeks, sending a second spouse to work, taking fewer and shorter vacations, etc. This boosts income statistics for families and households -- which conservatives love to cite -- but they are somewhat unreliable, since they do not reflect falling individual incomes. One way to sidestep these statistical problems is simply to measure the aggregate gains of entire income groups during the 1980s:
Percent Increase of Combined Salaries by Income Group, unadjusted for inflation (1980s) (9) Income Group Percent Increase ------------------------------------- $20,000 - 50,000 44% 200,000 - 1 million 697 Over $1 million 2,184
To put this chart in perspective, 85 percent of the American workforce
was making less than $50,000 a year in the 80s. And inflation
for the 80s totaled about 50 percent, which means that middle
class income gains didn't even keep up with inflation. Meanwhile,
the incomes of the super-rich sky-rocketed.
The following chart shows an even clearer picture of growing inequality. It shows how large a slice of the national pie for family income was received by each quintile (or 20 percent group):
Share of aggregate family income by quintile (percent) (10) Year Lowest Second Third Fourth Fifth Top 5% ----------------------------------------------------------- 1980 5.1% 11.6 17.5 24.3 41.6 15.3 1994 4.2 10.0 15.7 23.3 46.9 20.1
Notice that the bottom 80 percent saw a shrinking slice of the
pie. Even in the top quintile, all the growth was concentrated
in the top 5 percent (actually the top 1 percent). Recall the
Harvard and Berkeley studies which found a correlation between
inequality and mortality rates. Health researchers confirm that
over the 80s, the gap between white and black death rates (to
use an example) did indeed widen. (11)
The weakness of middle class incomes had nothing to do with their productivity. Between 1980 and 1994, individual worker productivity grew about 1 percent a year. Combined with population growth, this resulted in the Gross Domestic Product growing from $3.9 trillion to $5.3 trillion (in constant 87 dollars). Per person, that should have represented an increase from $16,584 to $20,476. (12) But, despite working longer, harder and more productively, workers have seen the profits go to the very top. In fact, economist Paul Krugman calculates that 70 percent of all income gains in the 80s went to the richest 1 percent! (13)
How could this be happening? By 1980, the U.S. had finished two decades of the greatest equality it had ever known. Poverty had been reduced to a record-low 11 percent. The secret was progressive taxation and regulation. Our government at that time simply did not allow the natural downward pressure on wages to occur. Laws established a minimum wage which provided a stopping point in the workers competition for jobs. The top tax rate ranged between 70 and 91 percent, which prevented wealth from concentrating in the hands of the richest, and redistributed it back to the poor and the middle class.
All that changed in 1981, when Ronald Reagan became president. He froze the minimum wage for the next nine years, allowing inflation to reduce the earning power of the working poor. He immediately imposed a moratorium on all new regulation, and began slashing and burning what already existed. The Federal Register, the book where all of America's proposed and adopted regulations are found, was cut almost in half -- from 87,012 to 47,418 pages -- between 1980 and 1986 alone. (14) (This trend continues to this day.) Taxes on the rich were also slashed, from 70 percent to as low as 28 percent.
The result of all this was that the U.S. moved closer to unregulated capitalism, and the natural downward pressure on wages was allowed to take place. The only reason the exploitation did not become even worse was because some regulation and progressive taxation remained. Increasing them is one way to reduce exploitation -- although to what degree this should be done is a matter of voter judgment. It would be difficult to assign an exact point on the spectrum where inequality turns into exploitation, so perhaps the best policy is to recognize that it is a spectrum, with greater deregulation resulting in higher death rates and abuse.
The best solution, however, is not through government, but through labor unions. Government is an indirect and inefficient tool for stopping exploitation; organized labor goes straight to the heart of the problem. The worker's difficulties arise from the fact that he must compete with others for jobs. But if they join together to initiate collective bargaining, they eliminate downward pressure on wages, and negotiators can strike a more honest wage agreement. Notice that conservatives and libertarians have no valid reason to oppose collective bargaining. They believe that contracts should be voluntarily agreed to by both parties (even if negotiations turn out to be tough), and they believe in the right of free association. The only reason to oppose labor unions, then, is because they threaten the interests of the upper class.
Return to Overview
1. George Davey Smith and others, "Socioeconomic Differentials in Mortality Risk among Men Screened for the Multiple Risk Factor Intervention Trial: I. White Men," American Journal of Public Health Vol. 86, No. 4 (April, 1996), pgs. 486-496; George Davey Smith and others, "Socioeconomic Differentials in Mortality Risk among Men Screened for the Multiple Risk Factor Intervention Trial: II. Black Men," American Journal of Public Health Vol. 86, No. 4 (April, 1996), pgs. 497-504; Gopal K. Singh and Stella M. Yu, "US Childhood Mortality, 1950 through 1993: Trends and Socioeconomic Differentials," American Journal of Public Health Vol. 86, No. 4 (April, 1996), pgs. 505-512; C. Wayne Sells and Robert Wm. Blum, "Morbidity and Mortality among US Adolescents: An Overview of Data and Trends," American Journal of Public Health Vol. 86, No. 4 (April, 1996), pgs. 513-519.
2. Robert Pear, "Big Health Gap, Tied to Income, Is Found in U.S." The New York Times, July 8, 1993, pp. A1.
3. "Vital Statistics Report Shows Broad Gains in the Nation's Health," DHHS News, U.S. Department of Health and Human Services, October, 1996. The report is available from the National Center for Health Statistics, 6525 Belcrest Rd., Hyattsville, Md. 20782 or by e-mail at email@example.com.
4. The Centers for Disease Control report that eliminating homicide completely would add only 3 months to general life expectancy. Black males account for 6 percent of the population, but 40 percent of all homicide victims. That is about 20 months less life expectancy for black males. Deaths from drug abuse are far lower.
5. George A. Kaplan and others, "Inequality in income and mortality in the United States: analysis of mortality and potential pathways," British Medical Journal, Vol. 312 (April 20, 1996), pgs. 999-1003. Also Bruce P. Kennedy and others, "Income distribution and mortality: cross sectional ecological study of the Robin Hood index in the United States," British Medical Journal, Vol. 312 (April 20, 1996), pgs. 1004-1007.
6. Kaplan and Kennedy quoted in Robert Pear, "Researchers Link Income Inequality to Higher Mortality Rates," The New York Times, Friday, April 19, 1996.
7. For 1982 recession data, see footnote 8; for Massachusetts example, see Paul Krugman, Peddling Prosperity (New York: W.W. Norton & Company, 1994), p. 41.
8. Average Hourly Wages (Total private industry, 1982 dollars): U.S. Bureau of Labor Statistics, Series ID: eeu00500049; Unemployment Rate, Civilian Labor Force, 16 and older, Seasonally Adjusted: U.S. Bureau of Labor Statistics, Series ID: lfs21000000; Civilian employment as a percentage of civilian non-institutionalized population (16 yr. and over, seasonally adjusted): U.S. Bureau of Labor Statistics, Current Population Survey, Series ID: lfs1600000.
9. Internal Revenue Service data reported in Donald Barlett and James Steele, America: What Went Wrong? (Kansas City: Andrews and McMeel, 1992), p. 1.
10. U.S. Bureau of the Census, Current Population Reports, Series P60
11. Pear, "Big Health Gap."
12. U.S. Bureau of Economic Analysis, National Income and Product Accounts of the United States: volume 2, 1959-88, and Survey of Current Business, March 1995.
13. Paul Krugman, "The Rich, the Right, and the Facts," The American Prospect no. 11 (Fall 1992): 19-31.
14. "Rolling Back Regulation," Time, July 6, 1987, p. 51.