My recent post on the Pope’s misguided accusation of business for exploiting workers has received some reactions that indicate a misunderstanding of the role of business and the proper role of government. I will focus on these two related issues here.
First, it must be clarified that business firms do not have the power to force workers to accept low wages, no more that they have the power to force workers to work as slaves. Exploitation of workers or others is only possible through the initiation of physical force (including fraud). Only government can make such initiation of force possible. There are, of course, a myriad of ways that governments themselves in mixed economies initiate physical force and thereby enable businesses to do the same.
Government uses force to limit or eliminate competition among businesses, for example, by granting monopolies (utilities, the postal service) and subsidies to ‘critical’ or ‘strategic’ businesses (the Canadian airplane and train manufacturer Bombardier and the now defunct telecom company Nortel are prime examples), and through taxation. Such government use of force—which prevents some businesses from entering markets and boosts others with money extracted from individual and corporate tax payers—distorts the price system of the markets. By initiating force, the government allows some companies to ignore market prices, those set by undistorted supply and demand, and pay lower (or higher) than market prices, including wages.
Only in markets distorted by government use of force—in statist economies—can workers be paid lower (or higher, as I discuss below) wages than the value of their productive effort in free markets. Absent government initiation of force, companies would be free to set their prices. If they tried to set their wages too low, workers would leave to work for competitors. Absent government use of force, there would be opportunities to create value for customers and shareholders, and therefore, competing companies—and employment opportunities.
When government does not use force to interfere with markets, the demand for employees’ labor would determine their pay level. The higher their productivity, the higher their pay. If companies tried to keep wages artificially low in a vain attempt to maximize their profits, they would lose their most productive employees and therefore their ability to deliver value to their customers and shareholders, undermining their long-term profitability.
Therefore, it is not in a company’s self-interest to pay artificially low wages in a free market where competitors are eager to hire productive employees and pay them what they are worth. A profitable business needs productive, content, and loyal employees—such as Costco Wholesale that compensates its employees according to productivity and therefore incentivizes higher productivity and avoids costly worker turnover.
Government use of force can also distort employee compensation to be higher than what their productivity would warrant in free markets. Companies that are ‘protected’ from competition by government-granted monopoly status, subsidies or bailouts or other government coercion, may pay their employees (including executives) more than they are worth.
Minimum wage laws also force companies pay what government deems to be a ‘decent’ or ‘living’ wage. However, government bureaucrats or politicians are poor substitutes for setting appropriate wage levels. The free market—where the prices represent the summary of the judgments of all those thousands, millions, or billions of individuals and companies trading in it—does it much better, continually adjusting it to supply and demand and rewarding higher productivity with higher pay. Minimum wage laws don’t lead to ‘decent’ wages but to unemployment, particularly among the young, unskilled, and those wanting to work part time, thus taking away opportunities to learn, improve their skills and increase their income levels.
By producing and trading material values, from food and life-saving medicines to productivity-enhancing equipment, insurance policies, and entertainment, businesses enhance our survival and well-being. They are a force for good. Those ‘businesses,’ despite calling themselves that, who exploit others by initiating physical force, do not produce and trade values and therefore do not deserve the title of ‘business.’ They are able to exploit others only because government makes it possible by its own initiation of force or by neglecting to perform its only proper role: protecting individual rights against the initiation of force.
If we want to prevent exploitation by ‘business’ and to protect life-enhancing value creation by legitimate business, we must recognize their cause and demand government to stop initiating physical force, free the markets, and protect individual rights of business—its freedom to pursue profits without initiating physical force against others.