Why Is the Pay So Lousy?

The make-or-break elements of a prosperous economy.

[](/sites/default/files/uploads/2013/11/small-wages.jpg)Even if you’re lucky enough to have a job in the Sarbanes-Oxley-Dodd-Frank-Bernanke-Sebelius-Obamacare economy, and even if you’ve beaten the 31-year record and are still part of the 62.8% of American adults who are working even though job creation in October was less than the increase in the adult population (204,000 vs. 213,000), and even if your weekly hours haven’t been cut to 29 or your health plan outlawed because it was, in the words of New Jersey Congressman Frank Pallone, “lousy,” you still might be wondering what happened to your raise.

I have some bad news.  You don’t get paid much more because of how difficult your back-breaking labor is. You don’t get a raise because you’re so much smarter than everyone else in the world. You don’t see an increase in your wealth just because you have an Ivy League degree.

You get paid more because of the quantity and quality of accumulated capital that is invested in your work.

Let’s take a step back for a moment. When we talk about pay, we really mean the stuff – food, clothing, shelter, Newcastle Brown Ale, iPhones, superbowl tickets – that the wages that you receive can buy.  It is futile to earn more money if the value of the money is collapsing due to inflation (that is, the price of everything is going up faster than your wages), or less stuff is being produced, leading to higher prices for everything that is still being produced. You could earn a billion deutschmarks an hour, but if that amount of money will only buy a single egg, as it did at one point during the hyperinflation of Weimar Germany in 1923, then you’re not rich. If, on the other hand, entrepreneurial capitalism, with its division of labor, improvements in technology and automation and visionary leadership, is having the result that less labor is required in almost every industry to produce stuff than what was required before, then prices of stuff that wage earners buy will fall relative to the wages they receive.  At the end of the day, it’s not rising wages that counts so much as the falling prices of the stuff people buy with their wages.

If you take almost any professional, whether a plumber, a gardener, a computer programmer or a doctor, and transplant him or her from an advanced country like the United States to work in a second-tier or Third-World country, that professional will earn less than – perhaps only a fraction of – the pay he or she earned in the First World. In some cases, the relative loss of income may be offset by some elements of a lower cost of living, but that effect is limited; ultimately the material quality of life will be much lower.

Why is that?  The professional is just as smart in Mexico or Rwanda as (s)he was in Germany or Singapore. But (s)he has less capital to work with. Just as a worker with a bulldozer is more productive than a worker with a shovel, all professionals depend on a developed infrastructure, state-of-the-art machinery, computers, technological instruments, information and transportation systems, communications networks and more to get their work done in the most productive way. Every worker in the First World sits on top of a gold mine of capital accumulated from prior generations, which he or she had no hand in building, to make his or her work that much more productive and valuable.

The capital that undergirds the economy takes many forms, from the obvious and tangible assets of land, factories and machines, to the less-obvious and intangible ones of management methodologies, technological processes and know-how, advanced and uncorrupted legal systems and private property rights.

Those last two are the make-or-break elements of a prosperous economy. Because if private property is not respected and defended, and/or if contracts are not enforced, and/or if the justice, tax and/or regulatory systems are corrupt, capricious and arbitrary, then the formation and deployment of capital will be retarded or destroyed no matter how many physical and intellectual resources are available. If you don’t believe this American on this point, ask the Peruvian economist Hernando de Soto, author of “The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else,” who documented all of the “dead” capital that exists in the Third World, due to the lack of a system of recognition of ownership, in order to unleash its power to create wealth for all.

This point cannot be stressed enough: Physical assets like coal, oil, gas, timber, minerals etc. are worthless without a system of private property and prices in which unarmed, unprivileged and unpersecuted non-government entrepreneurs, large- and small-scale, may operate.  The world is full of resource-rich countries, from Mexico to Nigeria and from Venezuela to Russia, which pathetically under-perform other nations like Japan, Switzerland and Singapore, which have no such endowments but which have well-developed legal systems of private property recognition and contract enforcement.  Russia, with its 13 time zones and vast natural resources, has a per-capital standard of living that ranks roughly 50th in the world.

So if you are not seeing an improvement in the purchasing power of your wages or the material standard of living over time, and the same thing is happening to millions of people just like you (a.k.a. your cohort), and there isn’t a major war on, chances are that intangible capital is faltering. And that in turn is probably due to attitudes and policies promulgated by politicians complaining that the “rich” aren’t paying their fair share of taxes, closing off natural resources to development, and slapping so much regulation on businesses that they spend ever more time and energy on compliance instead of innovation, effectively working for the government instead of for their customers. That has been the trend in the United States since 2001 with Sarbanes-Oxley, accelerating since 2009 with Dodd-Frank and the Pelosi-Reid regulatory apparatus.  Obamacare, with its effective abolition of voluntary cooperation between employers, employees, patients, doctors and insurance companies, is the single most destructive factor in this picture today.

High and rising wages depend on the quantity and quality of liberated capital invested in the labor. Whether you are a banker or a tree surgeon (and when I say banker I mean it in the traditional sense of a trusted conservative steward of customers’ money as opposed to a politically-connected financial manipulator), the respect and defense of capital and private property matters to you, and you need to participate actively in the civic society for the furtherance of that respect and defense.

Howard Hyde is author of “Pull the Plug on Obamacare,“ available in Kindle and paperback editions from Amazon.com. He edits the website www.hhcapitalism.com. Email: [email protected] Follow on Twitter: @HowardHyde.

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