Improving Our Standard of Living (Wattpad Edition)

Chapter 10: Markets Could Be Freer

Our increasingly capitalistic world still has its problems. One of the big ones that I elaborated on is excessive income inequality.

It isn't a new problem. Gross inequality predated capitalism and was much worse in antiquity. For most of human history, the "minimum wage" was zero. Most people were slaves or serfs. Women were practically slaves. The few individuals who did earn a wage were still basically slaves. The income gap between business owners and wageworkers was so bad that the Roman academic Cicero wrote in 44 BCE that "vulgar are the means of livelihood of all hired workmen whom we pay for mere manual labor, not for artistic skill; for in their case the very wage they receive is a pledge of their slavery." [1]

Adam Smith wrote that when employers can get away with it, they'll pay their employees slave-like wages. He wrote:

[Employers] have generally an interest to deceive and even to oppress the public... Masters are always and everywhere in a sort of tacit, but constant and uniform combination, not to raise the wages of labor above their actual rate... Masters, too, sometimes enter into particular combinations to sink the wages of labour even below this rate. These are always conducted with the utmost silence and secrecy, till the moment of execution, and...the workmen yield...It is not, however, difficult to foresee which of the two parties must, upon all ordinary occasions, have the advantage in the dispute, and force the other into a compliance with their terms. The masters, being fewer in number, can combine much more easily [when there are fewer competing businesses]; and the law, besides, authorizes, or at least does not prohibit their combinations, while it prohibits those of the workmen. – The Wealth of Nations, Book 1, excerpts from chapter 8 and 11

In other words, when there are just a few dominant businesses, the owners can get away with paying their employees unfair wages. Workers must accept because there's no one else to work for.

At the end of the passage, Smith wrote that employers can collaborate to lower wages, but employees don't have that option. This was at a time when unions were illegal, so unionizing wasn't an option.

To recap, according to Smith, there are two things that reduce market efficiency and cause inequality. First, a lack of competing businesses. Second, an inability of workers to organize and demand higher wages.

If he was right, then nations that are dominated by a handful of large enterprises and that have low union rates should have more disparity. Wage earners should have a smaller share of national income than large shareholders.

Indeed, that's the case, as I'll show later. Nations that have high union rates and many competing firms, such as the Nordics, do have lower income inequality. And they score better on market freedom indices.

Inequality doesn't exist because of the free market. It exists when it isn't as free as it could be. Capitalism is nothing more than the freedom to acquire property and tools to produce and sell goods and services. In a true capitalist society, everyone would have that right. But many individuals don't because of gross inequality and because regulations are stacked against them.

Starting a business or investing in one requires wealth, education, and other opportunities. If inequality and business regulations are excessive, then working class people are going to have more difficulty acquiring the skills, capital, and other opportunities to climb the economic ladder. Moreover, inequality will make it easier for the largest shareholders to monetarily influence politicians. The legislation they lobby for will make it even more difficult for new businesses to compete against them.

If inequality keeps growing in an otherwise capitalist society, it'll reach a point at which it's no longer capitalist. It will become an oligarchy instead—a country ruled by the rich and their companies. The economy will be dominated by a few megacorporations rather than many competing firms. Wages will plummet. Prices will soar. Quality will worsen. Innovation will stagnate.