“Efficiency,” the Myths of Markets, Minimum Wages, and a Universal Basic Income

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With the slow demise of churchgoing, capitalism is becoming the US’ national religion. Its foundational mythology helps maintain its grip on the nation’s popular imagination and politics. Among the most durable myths are the notions of “efficiency” and market self-regulation.

Just ask Alan Greenspan. He once was a universally lauded modern economist familiar with all the sophisticated math of his field. Yet as Fed Chair he let the myth of self-regulation promote the Crash of 2008. He later confessed his error in testimony before Congress.

Aided by seductive abstract thinking, generations of students have assimilated these myths. They are the catechism of capitalism. But they are too easily generalized far beyond their fidelity to facts and data.

Like the myths of most religions, from Rome’s Vestal Virgins on, these tenets of modern economics somehow manage to support and entrench the interests of the rich and the ruling class. They have fostered the most extreme economic inequality in human history, in which eight men won half the world’s wealth. Their failures have been responsible for workers’ rebellions throughout history, and for much of Trumpism today. Let’s analyze.

To set up our analysis, let’s begin with a few simple observations. In modern economics, the notion of “efficiency” nearly always boils down to the lowest possible price. If you can produce anything at a lower price, you’re increasing “efficiency.” The lower price may come from cheaper means of production, i.e., from brilliant new technology. It also may come from squeezing workers, i.e., paying them less and making their work harder and longer, under less safe and more miserable conditions. Whatever the means to achieve it, economists use the very same word to describe the result: “efficiency.”

As for self-regulating markets, Adam Smith famously wrote of the “invisible hand.” He had in mind a market for so-called “fungible” goods—indistinguishable, interchangeable physical products like apples, oranges, nuts or bolts. In such a market, with dozens or hundreds of sellers of much the same thing, the sellers that can offer the lowest prices can stay in business by winning in competition, and the “market” will become more “efficient,” offering lower prices. Those sellers, in turn, will put pressure on their suppliers to lower their prices, and so on up the supply chain.

The paradigm here is Wal Mart, which is famous—or infamous, depending on your point of view—for squeezing its suppliers. The result is pressure for lower prices and lower wages all the way up the supply chain to basic raw materials.

It doesn’t take great insight to see that this mechanistic, abstract model fails to account for an important reality. “Labor” is not just another a fungible product, because workers are people. It’s not like the other classic “factors of production,” namely, raw materials, land and capital, because only workers are alive and sentient. Only they can vote, rebel or storm the Capitol.

Even from a mechanistic perspective, workers are different. Unlike raw material, land and capital, they are also consumers. As such they are the source of much of the demand—about 70%, in fact, in our economy today. The less they have to spend and the more miserable are their lives, the less general demand there is for goods and services, regardless of their “efficiency” of production.

In an economy where workers as “consumers” create most of the demand, neglecting this negative feedback loop is a monumental conceptual error. In the last decade it has produced cheap Chinese products at Wal Mart that so-called “knowledge” workers can easily afford, but that the workers who used to make them can barely afford because they now work at Wal Mart or its suppliers.

You can call this a Catch-22. You can call it, as I do, the “Wal Mart Fallacy.” Or you can call it a “race to the bottom” in prices and wages. But in a democratic society that’s supposed to value workers as people, this system is not just a negative feedback loop. It’s also inhumane. Yet it’s the very same conceptual error that drove globalization.

In globalization, the primary means of realizing “efficiency” was not brilliant new technology. Instead, it was (for us Americans) much lower wages paid to workers in China and Mexico. Inside the UK, it was lower wages paid to immigrants from places like Poland and Slovenia. The result was unemployed or underemployed—and certainly underpaid!—native workers in the US and the UK. Trump and Brexit followed, as night the day. (The much-vaunted elevation of a billion out of poverty abroad focused only on the positive feedback loops there, neglecting the consequent negative feedback loops at home.)

Something very like this story happened at least twice before. The first time involved the mechanization of weaving with aid of mechanical looms in England in the early nineteenth century. Big, mechanized textile factories forced independent weavers and small-shop owners out of business, forcing them into penury or regimented employment under others’ control. The result was a violent uprising that destroyed many mechanized looms.

The movement’s participants took the name “Luddites.” The name has come to stand for any workers’ movement opposed to new technologies that bosses exploited in such a way as to make workers’ lives more precarious and miserable. Today it has a decidedly negative connotation, much as had the name “Neanderthal” before we discovered that many of us today carry Neanderthal DNA.

The second US instance of ignoring workers as people occurred more than a century later. As mechanical manufacturing consolidated on the US East Coast and in the Industrial Upper Midwest, it herded workers into tiresome factories, with endless rows of sewing machines or machine tools. Along came a subgroup of bosses called “efficiency experts”—a now-discarded title—who told workers how long they had to work, how little time they had for breaks and when (if at all) they could take lunch or go to the toilet.

Many of these workers had once labored at home, or in small shops of so-called “cottage” industries that they partly owned. Mechanization forced them into an ant army in a dystopian factory landscape, wage slaves in businesses owned by others. They worked long hours with every aspect of their working lives monitored and controlled, down to bodily functions.

Not surprisingly, they were not happy. Their common discontent produced the progressive labor movement of the early twentieth century. It strengthened greatly after unregulated capitalism and greed caused the Great Depression.

These problems were not confined to the United States. They affected all developed industrializing nations. But the US owned the twentieth century because it invented the most practical solutions.

Russia and later China adopted Communism, which failed in both countries. Germany and Japan tried fascism—essentially a militarized version of slavery in which ultra-nationalism and jingoism motivated native people to enslave others. It took the most terrible war in history to defeat it, but fascism failed, too, although it had a resurgence in Latin America and is now making a comeback worldwide.

In the last century at least, we Americans were smarter than that. Rather than adopt grandiose abstract plans that ignore workers’ needs and humanity, we made small, targeted changes that actually worked. The first was quite simple: we let workers form unions to bargain collectively for better pay and better lives.

Our second practical solution ironically came not from workers, but from a budding oligarch, Henry Ford. He was an industrial tyrant, a fierce anti-Semite, and a bit of a know-it-all. But he was also a brilliant engineer and a practical man. He figured that, by raising his workers’ pay unilaterally, he could make them more content with their hard, tedious assembly-line work. More important still, he could let them afford to buy the cars they made.

As I’ve explained in more detail in another post, that simple virtuous circle—what engineers call a positive feedback loop—helped create history’s most prosperous consumer society yet. Higher wages bred worker satisfaction, greater demand and purchasing power among ordinary laborers, yet more jobs for people who make things, and a thriving consumer economy.

Today, Ford’s contribution to good economic practice is all but forgotten. Our management class, its GOP lackeys, and a host of so-called “conservative thinkers” have inveighed relentlessly against higher minimum wages, arguing that they kill jobs. These worthies continue to argue this despite increasing evidence that minimum wages don’t kill jobs. Meanwhile, 70% of our people support them, and mainstream economics now does, too.

In Ford’s day, his own social class lined up against him. A clueless Supreme Court of Michigan nixed his plan to withhold dividends to shareholders, and instead invest in bigger, more efficient plants to make cars cheaper and even more accessible to the masses. The court infamously ruled that dividends to shareholders came first. Today, a glimmer of understanding has come from our own Business Roundtable, which recognized, at least in theory, social goals more important than profit. Whether that recognition was more than clever public relations remains to be seen.

At then end of the day, the most “efficient” labor system is slavery. It reduces the cost of labor to bare upkeep, a few bullwhips and cages and the straw bosses’ pay. If you really believe in “efficiency” as just lowering the cost of labor so businesses can better compete in an abstract “free market,” then slavery is for you.

Of course we abandoned slavery, but only after our most terrible war on our own territory. Yet we approach something like slavery today for eleven million undocumented immigrants. Utterly lacking legal status, and in fear of being deported with a single phone call, they have no practical means to exercise whatever “human rights” they may have as aliens. (César Chávez’ United Farm Workers union depended on immigrant workers’ legal status under the now-discontinued bracero program.)

We Americans tried slavery, in about half of our territory, for two and a half centuries. But eventually the “better angels of our nature” decided it was inhumane and incompatible with democracy. Eventually, I hope we’ll also jettison the idea of keeping a labor force of millions of serfs made powerless by realistic fear of instant deportation. That, too, is incompatible with our democratic system, not to mention our credo that “all . . . are created equal.”

Fuzzy and seductive abstractions like “efficiency,” “liberty,” “small government” and “free markets” aside, in our rough two-and-a-half centuries of national existence, we have discovered only two good, practical ways to maintain reasonable living standards for workers and a robust consumer economy. The first is collective bargaining by workers. The second is periodic increases in wages to match inflation and broader societal progress, along with regulations improving worker safety and working conditions. No other means have we as a nation—or any other nation—tried successfully.

Today, globalization makes collective bargaining difficult if not impractical. Globalization produced Trumpism because American workers have no practical way to bargain collectively together with Chinese or Mexican peasants taking their factory jobs abroad. For a variety of reasons, international unions just aren’t possible, although at some hypothetical future time they might be. “Workers of the World, Unite!” is today just a distant dream and a slogan lost in the mists of history.

As a practical matter, the oligarchs still control most of our politics. Few, if any, have the vision of Henry Ford. So random, haphazard raises in minimum wages by individual oligarchs like Jeff Bezos are not the solution to workers’ justifiable unrest. The only real solution is federal mandates for minimum wages. That’s why a new minimum, $15 per hour, has been decreed for federal workers only, and its broader application is currently under discussion. This dismal time, in which a pandemic has caused an echo of the Great Depression that ended child labor and produced minimum wages generally, may be a good time for progressives to strike while the iron is hot.

The problem of supporting adequate lives for workers is just another example of the “paradox of the commons” familiar to environmentalists. If business firms incur no costs for polluting our environment, and if they can save money by polluting, the ones that pollute most will be able to offer the lowest prices for their wares. By being the most “efficient,” they will prevail in competition, and every firm will have a perverse incentive to pollute.

Just so, if firms can lower their costs and become more “efficient” by squeezing their workers, they will do so, and workers everywhere will suffer from this “race to the bottom.” So will our consumer economy, which depends on the pay of workers, in their capacity as consumers, to drive 70% of demand. When firms export jobs to employ workers for less pay and cheaper conditions, another result is the hollowing of our national industrial, technological and eventually scientific base.

That’s precisely what happened with globalization. Firms raced to move jobs to China and Mexico to become more “efficient.” As a result, American workers suffered unemployment and underemployment, and the American consumer economy became less vibrant and resilient. The consumer economy as a whole became “polluted” by unemployment and reduced demand for goods and services, for which no firm striving for “efficiency” was held responsible. Only strong collective bargaining or government-imposed minimum wages could save the “commons” of worker welfare and enhanced consumer demand, just as only regulation or artificial pricing mechanisms like “cap and trade” could and can save our environment.

But as practical people (if we still are!), we Americans ought to be looking for even better solutions that we’ve found in the past. Here Andrew Yang’s “universal basic income” (UBI) is worth considering. It directly addresses the core question, which minimum wages address only incidentally: what is the minimum standard of living that any citizen of the world’s still-wealthiest nation has a right to expect?

The current deadly pandemic has made tens of millions jobless. Without relief, it promises to make many of them homeless. So it has raised that question in stark relief.

We now understand more about national economies than did the last century’s ignorant armies clashing by night over Communism, socialism, fascism and capitalism. We now know two vital, practical economic truths. First, minimum living standards for workers avert social cataclysms like the French Revolution, the Russian Revolution, the Great Depression, and the Reign of Trump with its Capitol Insurrection.

Second, assuring everyone a minimum standard of living is not just charity or a gift. The money that all get will circulate immediately in the economy, making it more robust. The same cannot be said of the great inheritances and speculative investments of the wealthy, which remain locked up in bank and brokerage accounts, often offshore. In other words, assuring a minimum standard of living for everyone makes everyone better off, including those lucky enough to find work in addition to, or even in lieu of, a basic income. The basic-income recipients’ demand for goods and services helps raise everyone’s wages.

In a different time, Andrew Yang might have been another Henry Ford. He is, after all, a successful entrepreneur himself. But times have changed. Today Yang’s wealth and businesses are nowhere near as big a part of our national economy, let alone our national imagination, as Henry Ford’s were in his day. So Yang can’t implement his ideas directly; he must sell them to us as voters.

It’s not as if Yang’s ideas are wholly unprecedented. Alaska—with its small population and lucrative oil leases—has a form of “negative income tax.” It gives every legal resident a payment from its Alaska Permanent Fund of $1,600 a year (on average, inflated to 2019 dollars). While that’s nowhere near enough to live on for a year, studying its effects might help economists debunk the canard that something like Yang’s UBI will encourage large segments of the population to smoke pot and listen to music all day, rather than doing anything productive or useful with their lives.

What would a national UBI cost, and what would it provide? Allotting $12,000 per year to every household now earning less than $25,000 per year would cost us $12,000 x 128 million x 0.28 = $420 billion. That’s 45% of our estimated defense spending for fiscal year 2020-2021. It’s less than one-third of the cumulative effect of Trump’s 2017 tax cut.

What general benefits would this relief/extra income provide? First, since those households spend virtually every penny they earn, it would provide a direct, permanent economic stimulus to American businesses that sustain basic living, including farms, supermarkets, landlords, gas stations, drugstores, etc. Second, it would promote economic stability over time, in good times and bad, by ensuring a stable level of minimum economic activity. Third, over time it could replace all the byzantine forms of welfare in the various states, including SNAP or “food stamps,” thereby improving states’ budgets and relieving residents of a maze of complex, confusing and often unfair rules. Fourth, if calibrated to the regional cost of living, it could reduce incentives for internal migration and improve social and economic stability, allowing people to build more stable and enduring communities. Finally, it could reduce, if not resolve, the problem of homelessness by allowing everyone to afford reasonable habitation somewhere.

The devil, as always, is in the details. But we ought to consider adding something like a UBI to our very small box of practical tools to keep workers content and economically active in an ever-changing economy.

The only other practical tools we know are collective bargaining, oligarch enlightenment à la Henry Ford, and minimum wages. Collective bargaining won’t be possible until, if ever, globalization finishes—an outcome now increasingly unlikely due to supply-chain disruption, nationalism and the pandemic. No one today, even Jeff Bezos, has the clout to affect the national economy like Henry Ford. So if we want to maintain a robust economy at all times, if we want to avoid unnecessary economic instability, keep workers content, and not have another French Revolution or Capitol Insurrection, all we’ve got to work with are minimum wages and some day a UBI.

We’d better start thinking more seriously about them, and stop dreaming about seductive abstractions like “efficiency” and “free markets,” which once gave us slavery and today justify our keeping eleven million undocumented serfs, not to mention an industrial base that can’t even make its own nuts and bolts. Surely, as a practical and a just people, we can do better.

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