THE problem of 140 million people learning to live better and better year after year sounds easy and pleasant. But strangely enough we shall probably find it a somewhat difficult task. It will be difficult because what it requires is that we get a lot more purchasing power—in other words, a lot more money—out into the hands of a lot more people, particularly those people who need it most and who in our system have always had the most difficulty in getting it—the wage earner, the farmer, the lower-income groups generally.
This means a different distribution of our national income than we’ve had before. And the redistribution of income is a subject which many people find distasteful to talk about—much less to do something about. But talk about it and do something about it we must, because this is not a matter of taste; it is a I matter of national economic necessity.
Why is it that we as a people generally are unable to buy all that we are capable of producing except during a war period such as the one from which we are now emerging? The answer is because too many of us are unable to get sufficient money to spend in spite of our abilities, training, and desire for work. Some of the people who find discussion of the distribution of income distasteful, however, have persuaded themselves that this question of how we divide up our total national income year after year has nothing to do with the issue of full employment and full production. Let me dispose of that notion right now.
Let us suppose that one per cent of the population were to receive 95 per cent of our entire national income, with the remaining 5 per cent spread among the rest of us. Could our system-could any system-work on that basis? One per cent of the people couldn’t possibly consume 95 per cent of all the goods and services which the rest of us could produce. And surely if they couldn’t consume our annual output, they would have no reason to use their savings to build more and more plants and facilities to produce more and more goods which they couldn’t consume, either. In a system as unbalanced as that there couldn’t be much production and not many of us could find jobs.
I’ve taken this extreme case, not because it makes any sense but because it demonstrates the nonsense of the contention that the way our national income is divided among us has nothing to do with how much 1 we produce or how many of us have jobs. On the. contrary, the distribution of our annual income has almost everything to do with our total production and employment.
Now, there are some people who jump to the opposite extreme. They insist that unless and until there is complete equality of incomes, we cannot hope toj achieve sustained full production and eliminate unemployment. In my judgment this is as bad an error as the other.
Certainly we need a greater equality in the distribution of our national income than that in the extreme case I have cited. That is obvious. Certainly we need greater equality in the distribution of our total income than we have had during the past generation. That, too, I think, should be pretty apparent to anybody who agrees with me that the basic reason for the Great Depression was that we simply weren’t distributing enough purchasing power into the pockets of our people to buy all the goods that flowed from our increasing productive capacity.
Clearly, as we have seen in the last chapter, we are going to need a better distribution of income during the next twenty years if we are going to learn to live in the kind of world in which there is a good job for everybody who wants one.
But it doesn’t at all follow that we should go to the extreme of complete equality of incomes. If the mixture being fed into a motor is too rich and the car stalls, it doesn’t follow that you should shut off the gas entirely and try to run on air. A sensible driver carefully adjusts the carburetor until he gets a mixture on which the motor runs smoothly. In the same way, by one means and another, we need to adjust the distribution of our total annual income until enough money is going to all our people to buy all the goods and services which will enable our economy to run smoothly and under full power.
I don’t know just how far toward greater equality of income we need to go in order to keep our economy running at high speed, and no one else knows. I do know that we must make some moves in this direction if we are to avoid another collapse. How far we go should depend upon our experience. I, for one, am willing to go just as far as we must.
I am convinced, however, that we must guard against going too far. For under our economic system, rapid progress depends upon the incentives which are provided by incomes that are above the general average for the most persevering and the most capable. So long as we operate under the profit system—and I for one certainly have no desire to abandon it—and so long as we have no alternative set of incentives—and I have none to propose—we must have inequality of incomes if we are to tap the full ingenuity, vigor, and resourcefulness of our people.
Let me go further than this. Without adequate income and profit incentives, it seems clear to me, the sources of our economic vitality would dry up. Technology, instead of marching forward in giant strides, would slow down to a walk. The problem of learning to live up to our growing productive capacity would disappear because that capacity would cease to grow.
The Russians may yet show us that their kind of system can have the same drive and vigor and productiveness that ours has shown. Certainly we should all wish them well in their search for security and abundance. No other people have earned it more.
But even if they match our economic achievements, I set so much store by freedom of enterprise, freedom to do or not to do, freedom to come and go, freedom to be oneself, that I will always prefer our approach. I set enough store by the opportunities for the development of the individual and the challenge to the individual to make the most of his own capacities, which can be assured only under free enterprise, that it would take a lot more persuading than the Russians are going to be capable of, before I would swap our system for theirs.
Like Eric Johnston, I believe deeply that the United States and the Soviet Union have everything to gain by learning to work and live together. Like him, I want to see us engage in a friendly competition to see which system has the most of what it takes to raise national productive power and the national standard of living.
Now, let’s get back to our main question. How are we going to achieve a better distribution of our national income among all of our people—workers, farmers, and businessmen? Basically, that is a job for business, but government must help. Here is what I have in mind.
Keeping Wages and Prices in Balance
As this book is written we have government controls over prices and rents. These are temporary controls geared to temporary conditions. As supply and demand come into balance during the months to come they will gradually be eliminated. But I am talking of normal times when government controls are behind us. In ordinary times businessmen, whether they know it or not, are determining the distribution of income every day when they decide what wages to pay their workers and what prices to charge their customers.
There were relatively few industries in which, before the war, wages and prices were determined solely by the impersonal forces of a competitive market. How many firms simply matched their wages up against the going rates established in the market without any other test? Very few indeed. No, wages are largely determined by negotiation between management—organized management—and workers—organized workers. They are determined by collective bargaining. It is rare that management has the weaker bargaining position. Certainly, therefore, management has a voice, and frequently the dominant voice, in determining whether collective bargaining results in the right answers on wages.
And now with regard to prices, it is true that in many industries before the war they were still determined by the haggling of the market place, but in most of our great industries that is not the way prices have been set Normally they were set by management executives and by boards of directors who, to be sure, took into account what the managements of their three or four or perhaps half-dozen major competitors were likely to be planning on, but who nonetheless had an awful lot personally to do with whether we got the right economic answers on prices.
By now you may be wondering what I mean by the right economic answers. What are the right answers on wages and prices?
The right answers from the standpoint of all our people are those which give us wages high enough in relation to the price of goods, and prices low enough in relation to the wages being paid, so that we may have buyers for all the goods we can produce. Let’s examine that a little more closely.
Most of us live on wages or salaries, and so it is wages and salaries upon which the nation must principally count to maintain our consumer spending at the necessary high levels. It is perfectly true that the lender, the stockholder, the landlord, spend for daily living p art of the income they receive from interest, dividends, and rents. But these people generally save a large fraction of their incomes rather than spend it, and the more they earn the more they are likely to save. Basically it is on wages and salaries that we must count for mass purchasing power.
Now, I can hear you ask, “What about the farmer?” Well, who is it that eats the bread, the butter, the meat, and drinks the milk? Obviously the bulk of all farm products are bought and consumed by wage and salary earners. Anyone who wants to look at the figures on wages and salaries, on the one hand, and farm income, on the other, will find that the two move up and down together with clock-like regularity.
When there is unemployment in our cities, when payrolls are low and shrinking, farm prices fall and carry farm incomes down with them. It never fails. And when employment picks up and payrolls rise, so too does farm income. We have never had prosperity on the farm except when the great majority of the rest of us, that means those of us who live on wages and salaries, have had plenty of money to spend. Similarly, our farmers, long underpaid for their efforts, offer industry its greatest single market opportunity. So the right answers on industrial wages and prices are the right answers on farm income, too.
Let me point out next that increased wages won’t provide any more purchasing power for us consumers if prices go up just as fast. Clearly, if that happens, wage increases are not going to enable workers to buy any more goods than they could buy before—and that goes for farm products as well as for radios, automobiles, an d overcoats. If we need to consume a larger amount of goods as our industrial machine grows constantly more efficient, it follows that wages must be pushed up faster than prices, or be pushed up while prices are kept stable, or remain the same while prices are reduced. Only in that way can we pay for a constantly increased production of goods.
In some industries wages amount to as much as 50 per cent of the cost of production, in others to as little as 5 or 10 per cent. But taking all industries together, wages are the biggest single factor of costs. There are, to be sure, many other costs, but for the business economy as a whole the profit on each unit turned out depends primarily upon the difference between the wage cost per unit, on the one hand, and the price charged per unit, on the other.
Now, we know that a heavy proportion of all wages paid out to our workers gets spent. Most wage income has to be spent for food, clothing, rent, doctors’ bills, and other essentials. And most of the remainder goes to fill the need for new cars, washing machines, radios, and other developments in modern living which the average worker lacks. One way or another wages get spent. What about profits?
Some profits get distributed in dividends. The stockholders who receive dividends have to live, like the rest of us. They spend part of their dividends on daily living, but because, for the most part, their incomes are larger, they are able to save a substantial proportion. Besides, a good part of the profits is not distributed in dividends at all. It is saved by corporations and the firms that earn them. In other words, a large part of the total profits earned in any year is saved either by stockholders individually or by business itself.
These savings may go into the bank, or into the treasury of an insurance company in return for a policy. When the bank or insurance company loans out the money to pay for new housing, new factories and equipment, or when it is invested for the same purposes directly by a business or individual, everything goes smoothly.
Under such circumstances, as we have seen in previous chapters, our economy is healthy. Everywhere men are employed to build plants and equipment which these invested savings make possible. The wages they earn flow through the grocery store and the department store, back to the farmer and all the rest of us. But when those savings are not invested, when instead they stay idle in corporation reserves and the bank balances of firms and individuals, or when they are used to bid securities on the stock market higher and higher, we are in for trouble. Idle savings, savings that are not invested in job-producing new activities, don’t keep men working in the steel mills and they don’t buy any groceries.
Within reasonable limits, as we have seen, the government can balance up these unspent savings by increasing its own spending for highways, dams, schools, hospitals, and public buildings. But we have also seen that there are limits to what the government can do—unless we want to go in for a lot of useless boondoggling, which obviously we don’t.
So if we are to keep up with our increasing productive capacity without wasteful government spending accompanied by ever-mounting deficits, it follows that we need to increase the wages we pay for each unit of output, almost all of which gets spent, and to decrease the margin of profit per unit, most of which gets saved. And since businessmen play so large a role in determining wages and prices and profit margins, the job that has to be done is primarily theirs to do. But again there will be a cry that what I am proposing is impossible, that wage increases must be matched by price increases or business cannot continue to operate. Here, too, a glance at our past history, will prove useful.
If we go back to 1919, at the close of the First World War, we find that the level of average prices was just about the same as it is now at the close of this war. Since 1919 average factory wages per hour, however, have more than doubled. They were 47 cents in 1919 and, for several years, as we have seen in our discussion of the causes of the Great Depression, they moved upward at a snail’s pace in spite of rapidly increasing labor output per hour of effort. In 1934, however, they started to rise with greater rapidity and during the past year or so, they have averaged around a dollar.
Has this doubling of wages bankrupted American business? Hardly. Corporation profits before taxes in 1944 totaled 25 billion dollars, more than three times what they were in 1919.
There are dozens of specific examples which make the point with even greater sharpness than general averages. From 1935 to 1939 radio prices remained roughly the same. But wages increased by 15 per cent, while profits increased substantially. The record on electric refrigerators is even more striking. Prices to the consumer dropped 10 per cent between 1935 and 1939. But wages increased 25 per cent. Overall profits, instead of going down, moved sharply upward.
So, when the claim is heard that it can’t be done, that wages can’t rise unless prices rise too, the answer is, it has been done, it has always been done, and as volume goes up and increased labor output helps bring down costs, the pace must be even faster—that is, if we are really determined to provide sufficient purchasing power to buy all the goods we can produce. The question today is not whether wages generally can rise while prices generally stay the same. The questions are simply: How much? How fast? Where? When?
Of course, these questions on wages could be settled by government as they were during the war, but isn’t it much better if this is done through collective bargaining by labor and management, sitting peacefully around a table to decide how to divide up the income from their joint product? Of course it is. No one wants government to do what individual groups can handle better.
The techniques of successful collective bargaining— the techniques through which business income is divided among workers, management, and consumers through higher wages, increased profits and dividends, and better values and lower prices—are likely to improve rapidly in the period immediately ahead.
In bargaining for its fair share labor must accept the need for adequate profits to enable business to expand its plants, modernize its equipment, improve research facilities, and attract outside capital.
Likewise, management must accept labor’s right to the highest possible wages, to decent working conditions and steady employment.
Both labor and management must protect the interests of all of us as consumers by improving the quality of the products they produce and wherever possible by lowering prices.
Over a period of years we can improve our standard of living only by increasing our output of work for each hour of effort. This can be accomplished through improved management, improved labor skills, and the use of more efficient machinery. Whatever the cause, an increase in labor productivity results in lower labor costs per manufactured unit and usually makes possible increased wages, or increased profits, or a lower price, or even a combination of all three.
In the generation before the war the hourly output of each worker in manufacturing increased on the average 4 per cent each year. Of course, in some industries it was less’ than that and in others more, but as an average figure it’s an impressive testimony to our personal ingenuity and engineering skill.
Every group of workers that is protected by a strong union should work to increase its output in every reasonable way, for once a reasonable balance is achieved between wages, prices, and profits, at a given level of production, the soundest basis for future wage increases is through increased labor productivity. “Feather bedding” and other stretch-the-work techniques add to labor costs, increase prices to the consumer, and over a period of time hold down wages. They are a drag on the whole economy in our program for greater prosperity shared by us all.
I am hopeful that more detailed statistics on the increase in labor productivity, year by year, will become available in Hie future on an industry-by-industry or even factory-by-factory basis. Such figures will help tremendously to put collective bargaining on a more economic basis. They would protect employers against unreasonable demands. And they would give labor a basis for increasing its wages as its output increases.
In some industries increases in output per worker will be impossible even with the best of management and the most determined effort on the part of the employees. In such cases wages can be increased over a period of time only by raising prices or by cutting profits. If profits are not unreasonable, there is no alternative but to raise prices sufficiently to attract and hold the necessary workers at a decent level of pay. If prices on a particular product can be held down only through sweatshop labor then we consumers must accept the need for paying enough more to enable decent wages to be paid.
But in the dynamic economy on which we have set our hopes, there should be many other industries in which prices to the consumer can be reduced. Increased manufacturing efficiency will often enable prices to go down while wages and profits are going up, as we have demonstrated has been the case throughout our whole economic past. And the increased volume that almost invariably results from lowered prices serves sharply to reduce the cost of selling each individual unit.
In the whole field of prices, wages, and profits lies the real key to our economic future. Steadily increasing wages are the key to the vastly greater purchasing power which we shall need to buy our constantly expanded output of goods and services. But in our very proper desire to increase wages we must never forget the two essential principles: First, a general increase in wages that results in a general increase in prices is of little benefit to anyone. Second, if general wage increases result in an unreasonable squeeze on profits we will tend to dry up the investment funds needed to expand our factories and to modernize our industrial equipment.
Management and labor carry a heavy responsibility in working out these problems. The solutions will require patience, good judgment, and a realization that no one group can prosper for very long at the expense of the rest of us.
No one, of course, expects miracles. It isn’t going to be done overnight. No task as big as this job ever is. And there will be plenty of fumbling, too. We are all human beings working together and we are going to keep on behaving like human beings and making plenty of mistakes. But that will be all right. What will count is whether or not we’re on our way.
I started earlier in this chapter by saying that free enterprise can do the job. I say that because I cannot believe that free enterprise could have carried this country so far during the past century and a half only to fail us now when we stand on the threshold of an unlimited future. That would violate all our history and all our tradition. It would violate all that we have been, all that we are, and all that we may hope to become. I know in my very bones that that just won’t happen.