Thursday, March 31, 2016

HAWB 1800s - The Doctrine of High Wages - How America Was Built

The United States was established as a republic, at a point in world history when all other systems of government were monarchies, oligarchies, or some other form of despotism. What, then, are the proper precepts of political economy that a republic should use to organize and structure its economy?

In Securing the Fruits of Labor: The American Concept of Wealth Distribution, 1765-1900,
(Louisiana State University Press, 1998), Oklahoma State University history professor James L. Huston writes:
The republicanism that American leaders came to advocate held sacred the ideals of individual liberty, the equality of the citizens before the law, distrust of governmental power and of political demagogues, simplicity and frugality in the behaviors of the people, and public exhibition of virtue--the willingness of citizens to sacrifice their individual self-interest to obtain the common good. An important economic corollary of republicanism established primarily by Englishman James Harrington (1611-77) during the Puritan Commonwealth was widely acknowledged by American revolutionaries: to endure, a republic had to possess an equal or nearly equal distribution of land wealth among its citizens.
As the United States began to industrialize and urbanize, increasing number of citizens no longer lived and worked on the land, let alone owned land. The great failure of Thomas Jefferson and his Democratic-Republican Party (which later became the Democratic Party) was their inability to conceive of a way in which workers and the propertyless could be just a virtuous as agrarians and pastoralists, and also be accorded a full voice in public affairs. Instead, they sought to stymie and retard the progress of industrialization in the hope of prolonging their idyll of a republic dominated and ruled by agriculturalists.

The problems of that approach should be obvious. To lift propertyless workers to the exalted station of citizens of the republic, while preserving the republican notion of an equitable distribution of wealth, a theory of wage income began to develop which certain American economists came to call, by the last quarter of the nineteenth century, the Doctrine of High Wages:

Essay on the Rate of Wages: With an Examination of the Causes of the Differences in the Condition of the Labouring Population Throughout the World, by Henry C. Carey, 1835

The Rights of Labor, by Calvin Colton, 1847

Manual of Political Economy, by Erasmus Peshine Smith, 1853

Essays on the Progress of Nations: In Civilization, Productive Economy, Wealth, and Population, by Ezra Champion Seaman, 1869

Wages and Trade in Manufacturing Industries in America and in Europe, by Jacob Schoenhof, 1884

Proponents of the Doctrine of High Wages argued that not only were American workers better paid than their counterparts in England and Europe, but they were far more productive as well. In fact, American economists argued that high wages created a virtuous circle, in the superior productivity of American workers allowed them to be paid much higher wages than anywhere else in the world, while those high wages provided American workers a much higher standard living, which, in turn, enabled them to be more productive.
This uniquely American Doctrine of High Wages—which has been almost entirely driven out of the professions of economics and history over the past century, and replaced by the idea that high wages will create terrible problems of inflation—was explained by the chief American correspondent of the London Chronicle, A. Maurice Low, in a 1909 textbook of correspondence courses for (if you can believe it, but I am not making this up) business administration. (Business Administration, Vol. IV, Relations of Capital and Labor, by La Salle Extension University, Chicago, Ill., 1909)

by A. Maurice Low
According to the theory of protection, protection, in so far as wages are concerned, is both cause and effect. The effect of protection is to increase wages, and the increase of wages, that is, the higher scale of wages resulting as the effect of protection, increases the wealth of the country, puts into circulation a larger volume of money, and enables the wage worker to become a larger consumer, thus creating a larger demand for all commodities, and is one of the reasons (but not the only one) why the manufacturer is able to pay high wages. It is an endless chain, beginning in protection and ending in protection.

It seems unnecessary to waste time in the discussion of what no one disputes. It is a fact conceded by economists, statisticians, manufacturers and workingmen, by protectionists as well as free traders, that wages are higher in the United States than in any other country in the world; higher than in England, the country next to the United States. Where labor is most liberally remunerated in some trades in America, wages are more than twice as large as those paid in England....

One of the definite, and most important, results protectionists hoped protection would accomplish, was to raise the general scale to bring about a higher standard a higher standard of living of wages, of intelligence, of initiative, of the physical strength of the nation. These things protectionists frankly admit cannot be had for nothing; they must be paid for, and though the cost of living in America as compared with the cost in free trade countries may be a trifle higher, the difference is more than met by the advantages derived....

The standard of living in the United States being higher than in any other country, employers are compelled to pay higher wages. To make this highly paid labor remunerative, the employer might increase the hours of labor over those prevailing in other countries, and thereby obtain a larger output per man; or, he might, by more scientific methods, make his labor more productive. He could not put in force the first method, because labor in the United States will not allow itself to be unduly exploited or sweated for the profit of capital. Consequently, the alternative left to the manufacturer is to devise a system, whereby the laborer in America, frequently paid double the wages of the laborer in England for the same class of work, shall produce an output so much greater that the actual cost per unit of production is lower in America.

The experience of the American manufacturer engaged in every branch of productive industry has shown that the cheapest labor, is not the labor that commands the lowest price in the labor market, but on the contrary, that the cheapest labor is the labor that is the most productive, irrespective of first cost. Here, the American manufacturer, with his practical experience, runs foul of the theories of Adam Smith, Ricardo, Mill, and other economists who believed that a day's labor in one country was the equivalent of a day's labor in any other country, if the work engaged in was the same in both places—and on this theory, the so called iron law of wages was founded; a law which was not a law but merely an assumption which the facts have routed.

Low's article was accompanied by the following graph, spread over two pages, showing clearly how much higher wages in the United States were, compared to Great Britain, Belgium, France, and Germany. 

Wages of American labor compared to European labor, in 1909.

Note the point Low makes that the USA Doctrine of High Wages was completely contrary to the economic theories of the British school of Adam Smith, David Ricardo, and John Stuart Mill. It was generally known at the time that there were three major economic philosophies of political economy, developed during the nineteenth century: the British school, Marxism, and what used to be called the American School (at the link, there is a very useful table summarizing the three contending philosophies, from Michael Hudson's 2010 book America’s Protectionist Takeoff: The Neglected American School of Political Economy. One of the three cores of the American school was a protective tariff, the simple mention of which will cause "very serious people," such as economists, corporate CEOs, and celebrity journalists, to run shrieking from a room into a howling gale at night. In May, 1997, Hudson wrote, in “Theories of Economic Obsolescence, Revisited”:
The implications of technological change, industrial head starts and the causes of economic backwardness were analyzed above all by American economists in the mid-19th century who no longer are well remembered today: Calvin Colton, Henry Carey and E. Peshine Smith. These writers were associated with Whig (and, after 1853, Republican) politicians in shaping the industrial policies that transformed the United States from a raw-materials producing (“Southern”) economy into the world’s major industrial power as a “Northern” economy. Members of the American School typically are dismissed (if they are discussed at all) as protectionists. A more accurate name for them would be technology theorists, futurists or prototypical systems analysts. Their Theory of Productive Powers focused on industrial and agricultural technology, especially the substitution of capital for labor and land.

But a century ago, before the USA had congealed into the bankers' neoliberal dictatorship it is today, the extremely high wages of American workers was a point that even corporations boasted about in their PR material. The following is from the 50th anniversary company history of the Pennsylvania Railroad, the largest corporation in USA by many measures for almost two decades in the 1880s and 1890s, Seventy years of America's greatest railroad, The Pennsylvania 1846 - 1916, New York, NY, 1916.From the Foreword:
The greatest industrial achievement of the United States is its railroad system. Other countries have achieved greatly in manufacturing, in farming, and in mining. But in no country in the world has a transportation system been developed equal to that of the United States. The railroads in this country carry their freight at a cheaper rate, they pay higher wages to their labor, they pay out a greater percentage of their earnings in the form of taxes, than the railroads of any other country in the world.
Can you think of any corporation or industry today that would boasts it pays higher taxes and pays its workers more than anywhere else in the world?

It should be noted that an important precursor of the Doctrine of High Wages was Benjamin Franklin's 1783 essay “Reflections on the Augmentation of Wages, Which Will Be  Occasioned in Europe by the American Revolution,” which was published in Paris in the Journal d Economie Puplique. It is a deliberate and comprehensive attack on the “free trade” ideas of the house economists of the British East India Co., such as Adam Smith and Thomas Malthus.
...If the term wages be taken in its widest signification, it will be found that almost all the citizens of a large state receive and pay wages. I shall confine my remarks, however, to one description of wages, the only one with which government should intermeddle, or which requires its care. I mean the wages of the lowest class, those men without property, without capital, who live solely by the labor of their hands. This is always the most numerous class in a state; and consequently, that community cannot be pronounced happy, in which from the lowness and insufficiency of wages, the laboring class procure so scanty a subsistence, that, barely able to provide for their own necessities, they have not the means of marrying and rearing a family, and are reduced to beggary, whenever employment fails them, or age and sickness oblige them to give up work.

Further, the wages under consideration ought not to be estimated by their amount in money, but by the quantity of provisions, clothing, and other commodities, which the laborer can procure for the money which he receives.

....The horrible maxim, that the people must be poor, in order that they may remain in subjection, is still held by many persons of hard hearts and perverted understanding, with whom it were useless to contend. Others, again, think that the people should be poor, from a regard for the supposed interests of commerce. They believe that to increase the rate of wages would raise the price of the productions of the soil, and especially of industry, which are sold to foreign nations, and thus that exportation and the profits arising from it would be diminished. But this motive is at once cruel and ill founded.

....To desire to keep down the rate of wages, with the view of favoring the exportation of merchandise, is to seek to render the citizens of a state miserable, in order that foreigners may purchase its productions at a cheaper rate; it is, at most, attempting to enrich a few merchants by impoverishing the body of the nation; it is taking the part of the stronger in that contest, already so unequal, between the man who can pay wages, and him who is under the necessity of receiving them; it is, in one word, to forget, that the object of every political society ought to be the happiness of the largest number.

…. High wages attract the most skillful and most industrious workmen. Thus the article is better made; it sells better; and in this way, the employer makes a greater profit, than he could do by diminishing the pay of the workmen. A good workman spoils fewer tools, wastes less material, and works faster, than one of inferior skill; and thus the profits of the manufacturer are increased still more.

The perfection of machinery in all the arts is owing, in a great degree, to the workmen. There is no important manufacture, in which they have not invented some useful process, which saves time and materials, or improves the workmanship. If common articles of manufacture, the only ones worthy to interest the statesman, if woollen, cotton, and even silk stuffs, articles made of iron, steel, copper, skins, leather, and various other things, are generally of better quality, at the same price in England than in other countries, it is because workmen are there better paid.

The low rate of wages, then, is not the real cause of the advantages of commerce between one nation and another; but it is one of the greatest evils of political communities.

.... The rate of wages in Europe will be raised by yet another circumstance, with which it is important to be acquainted. I have already said, that the value of wages ought not to be estimated solely by the amount of money, nor even by the quantity of subsistence, which the workman receives per day, but also by the number of days in which he is employed; for it is by such a calculation alone, that we can find out what he has for each day. Is it not evident, that he who should be paid at the rate of forty pence a day, and should fail of obtaining work half the year, would really have but twenty pence to subsist upon, and that he would be less advantageously situated than the man, who, receiving but thirty pence, could yet be supplied with work every day? Thus the Americans, occasioning in Europe an increased demand and necessity for labor, would also necessarily cause there an augmentation of wages, even supposing the price of the day's work to remain at the same rate.

....Better days may come, when, the true principles of the happiness of nations better understood, there will be some sovereign sufficiently enlightened and just to put them in operation. The causes, which tend continually to accumulate concentrate landed property and wealth in a few hands, may be diminished. The remains of the feudal system may be abolished, or, at least, rendered less oppressive. The mode of taxation may be changed, and its excess moderated. And, lastly bad commercial regulations may be amended. The tendency of all these improvements will be, to enable the working classes to profit by the favorable change, which the American Revolution must naturally produce.
Unfortunately, the Doctrine of High Wages did not rule supreme, and there are historical examples too numerous to count, of workers in America earning only subsistence wages. And there is also the awful problem and legacy of slavery, which forever stands as a rebuke to the ideal of the political republicanism of the American experiment in self government. Nonetheless, this recounting of the Doctrine of High Wages will hopefully shock you into realizing how horribly distorted and misleading much of academic economics and history has become, by simply never acknowledging the existence of opposing ideas.

1 comment:

  1. I am old enough to remember when enterprises used to brag about high wages. Perhaps this is partly a function of a Minnesota upbringing—we all had high energy bills because of the climate so there was always a basic understanding that that pay packages had to cover higher costs. These attitudes were pretty common until 1973 or so.

    I seem to think that this was likely an offshoot of the “just wage” teachings of Christianity. Many of those religious colonies that took to forming some enterprise, like the Amana colony in Iowa, made their goal to share out any prosperity they could muster. Your link to the Tom Wolfe piece on Robert Noyce the other day was about the economic teachings of the Congregationalists. Max Weber made high wages a defining feature of the Protestant Ethic, IIRC. That does NOT mean Protestants couldn’t be disgusting jerks (Cecil Rhodes) but then, he was most certainly not Producer Class.