The way in which income is distributed influences the most fundamental relationships within a society and largely determines the very nature of the social structure itself. The income distribution system determines who will be rich and who poor; who powerful and who weak. It influences where people live, where they work, and what they work on. It determines what type of endeavors are considered important and what are not. It embodies a system of economic rewards and punishments that directs and, in large measure, controls the behavior patterns of the society as a whole, as well as individuals and groups within the society. The income distribution system pervades every aspect of daily life so deeply and so thoroughly that its influence is felt in virtually every act that people perform.
Certainly the income distribution system is so basic to the structure of relationships within a society that no effort to significantly improve society is likely to succeed unless it addresses the question of income distribution, and, conversely, no significant change in the income-distribution system is likely to produce anything less than profound changes in the fundamental character of the society at large.
In America, the existing income-distribution system is almost universally accepted without question, even among political liberals, in much the same way as people accept the rising of the sun or the force of gravity. To even question the fundamental premises of the American income-distribution system seems downright heretical, somewhat akin to questioning the wisdom of the Constitution or the existence of God.
Even among social reformers, little attention has been paid to the fundamental question of income distribution. As was pointed out in the previous chapter, the whole tradition of action programs in this country, including the New Deal and all its subsequent variations, has been based on the philosophy of helping the unfortunate to make it within the existing system. Seldom (except perhaps for the income tax and social security) has any fundamental change ever been made in the income-distribution system itself.
One reason why income distribution in America has seldom been a target of social reform is that it is impersonal and impartial. Western political thought tends to equate impartiality with indefectibility. If everyone has an equal chance, a system is usually regarded as ideal even though it be full of absurdities and incongruities. It may punish some individuals with inordinate harshness and reward others beyond reason, but it will not be questioned so long as it is impartial. The income distribution system establishes those activities that are rewarded and those that are punished. Individuals are then left to fight it out among themselves as to who fills which positions.
Society has established various filtering mechanisms for determining just where each person shall fit in the system.1 The first (though by no means only) filter is accident of birth. This selection mechanism is certainly the most ancient, and, although in recent times it has diminished somewhat in importance, it still is one of the most critical factors in determining what a human being´s position will be on the income ladder. Other filtering mechanisms are schools, examinations, fraternities, unions, and corporate hiring and promotion policies. Those who are more aggressive, more intelligent, or simply luckier get the better positions. The competitive nature of these filtering processes gives the final result an air of equity, particularly if the competition itself is not grossly unfair. Most social and political reforms over the past century have centered on increasing the fairness of the competition and the equality of opportunity. Unfortunately, the emphasis on fairness and equality has largely obscured the fact that the income-distribution system itself is grossly distorted, inefficient, and often counterproductive.
In the United States, as in virtually every industrially advanced country in the world, the overwhelming percentage of income is distributed through earnings paid to labor. Wages and salaries account for about three-fourths of all personal income.2 Even more important, four out of every five American families depend on compensation for labor or welfare for over 80 percent of their total income.3 These statistics clearly indicate how completely the present income-distribution system is dominated by wages and salaries. The consequences and implications of this fact are far-reaching indeed. There are a number of reasons to believe that the overwhelming dependence on wages and salaries is a major cause of waste, make-work, pollution, unemployment, poverty, discrimination against minorities and women, decline in personal services, and disincentives to efficient methods of production.
Pressures for Full Employment
One of the inevitable effects of distributing income almost exclusively through wages is that it generates overwhelming pressures for full employment. For all practical purposes, the only respectable way for a person of average means to obtain income in a modern industrial or post-industrial society is to hold a job. If one has no job, then, except for unemployment compensation or welfare, one has no income. If one loses a job, all income stops or at least is sharply reduced to whatever is currently obtainable through unemployment compensation. This generates enormous incentives to get and hold a job–any job–and the pressures of these incentives are transmitted through the political process into governmental and private policies designed to create or preserve jobs at any cost.4
The results are that make-work projects of every type and description are created, some of which are not only useless, but positively harmful. For example, one of the principle arguments advanced by proponents of the Anti-Ballistic Missile System was the need to keep the missile industry employed. A major factor in the government´s decision to grant the Lockheed Corporation a loan was that wide-spread unemployment would result from the bankruptcy of such a large corporation. Most of the support for the Super-Sonic Transport revolved around the need to create jobs in the depressed aircraft industry. The principle arguments of lobbyists for the B-l bomber revolve around the number of jobs to be created in the Congressional districts where this plane is to be built.5 Political pressure to maintain employment is one of the primary reasons for the perpetuation of the so-called military-industrial complex. It is virtually inevitable that Congressmen and Senators will oppose any attempt by the Defense Department to close obsolete military installations or to terminate major military contracts in their districts simply because such actions throw large numbers of people out of work.
Even in strictly civilian industries, pressures for the creation and maintenance of jobs often override considerations of convenience and health. For example, proposals to place more emphasis on mass transit and less on the automobile are widely opposed by those whose income is derived from the automobile, trucking, or highway construction industries. Restrictions on cigarette advertising are typically opposed by politicians whose constituents depend on the tobacco industry for employment.
For years we have espoused the philosophy that growth means jobs, and we have written tax laws and zoning ordinances to encourage and foster growth. The urban sprawl that scars so much of our landscape is a direct result of policies designed to generate growth so as to create jobs.
Throughout the entire economic system, policies of government and private industry alike are designed to ensure that employment remains high and layoffs are unnecessary whenever possible. Marketing and advertising programs are promulgated to create demand for absurd or trivial products. Goods are deliberately designed to quickly become obsolete, either through normal wear or changes in style. As a result, America has become a throwaway culture; as Vance Packard puts it, a society of "Waste Makers."6 Our industry is heavily biased toward disposable products that cannot be repaired or reused. At least part of this bias can be directly traced to efforts to maintain production and, hence, employment at a high level.
Pressures for maintaining and creating jobs are also clearly evident in union policies and in labor negotiating demands. Featherbedding and restrictive work rules serve no other purpose than to preserve obsolete or unnecessary jobs. Seniority rules and restrictive apprenticeship admission requirements are primarily intended to insulate and protect existing job holders from competition and possible replacement by equal or better qualified job candidates clamoring to gain access to the limited supply of employment positions.
Even at the executive level, pressures for job employment are strong. Much of the memo writing, paper shuffling, and red tape that goes on both in private industry and in government serves no other purpose than to provide work for otherwise unnecessary managers and bureaucrats. It is impossible to estimate just how much of what people get paid for every week in factories and offices across this land is really necessary work and how much might just as well not be done. One gets the feeling, however, that more than a little of what goes on during the average American work day is either make-work in and of itself or activity made necessary by make-work somewhere else in the system. The overwhelming importance of jobs, brought about by the fact that virtually the only way to get income is to have a job, has created a system that is enormously wasteful both in terms of natural resources and human creativity.
Pressures for Unemployment
Paradoxically, the distribution of wealth primarily through wages and salaries, while generating tremendous political pressures for full employment, has at the same time created conditions that virtually guarantee serious unemployment. The increasing ratio of capital to labor in modern industry has brought continuously rising output per man-hour of work. In some cases, this increased output might be attributed to increased skill or increased physical effort on the part of workers, but, in the overwhelming majority of cases, the increased output has been wholly due to more sophisticated machines or more efficient process technology. In either case, the result is the same. More has been produced and thus more must be distributed. Since wages are virtually the only means available for placing purchasing power in the hands of consumers, wages have had to rise along with rising output in order to insure sufficient consumer demand to prevent surpluses from developing. The present income-distribution system encourages, in fact requires, that wages spiral upward with each new advance in production technology. Otherwise, the economy could not consume the increased production.
To an employer, rising wages represent rising costs. As wages rise, the marginal benefit of hiring each new employee declines. High labor costs are a production factor that must be minimized if a business is to survive. An employer must strive to hire as few persons as possible, not because he has nothing for additional employees to do, but simply because labor is such a significant cost factor that every effort must be made to keep the payroll at a minimum. Increases in the cost of human labor force employers to reduce the number of employees to as few as possible. Employees are hired only for the time period when their services are needed. Production cutbacks result in immediate layoffs. Job applicants are care -fully screened so as to weed out all but the most capable and productive. Whenever possible, human workers are replaced by less expensive machines.
Distribution of most income through wages and salaries forces labor costs so high that many useful tasks are simply too expensive to be done. Streets need cleaning, buildings need repair, community health and recreation facilities need to be maintained, but the cost of labor is too high. Even in factories, universities, and research laboratories important work that needs to be done cannot be pursued because of the salaries that must be paid to even the lowest grade technicians. As a result we have an abundance of useful work that needs doing and a surplus of people willing and able to do it. Yet nothing can be accomplished because employers cannot afford to hire people for jobs that are not absolutely necessary. Under such circumstances it is virtually guaranteed that a sizeable percentage of the population will be jobless.
This is particularly true in the case of persons with no marketable skills. Anyone without capabilities for which employers are willing to pay the minimum wage simply will not be hired. If a worker cannot, even with machine assistance, produce enough output per man-hour to make it profitable for an employer to hire him, he becomes effectively unemployable. Distributing the wealth-producing output of machines and high technology processes primarily through wages and salaries artificially inflates the cost of human labor to the point where hard-core unemployment becomes inevitable.7
Milton Friedman, the conservative economist who, among his other notable accomplishments, was economic advisor to Senator Goldwater during the 1964 presidential campaign, has for years argued against the minimum wage laws, not on the basis that they are ideologically repulsive to a conservative but because they virtually guarantee a high level of unemployment among low-skilled persons. If a worker´s labor is not worth the minimum wage rate, it simply is not good business to hire him.
Presumably, it is possible to train some unemployed persons so that their labor becomes worth more than the minimum wage. However, in practice, job-training programs have not proven very successful.8 In a great many cases, hard-core unemployables have physical or mental defects that make it virtually impossible to ever increase their skills to the point where their labor would be worth present-day wages.9 Moreover, in many instances, job training or the lack of it is not even relevant to the issue of unemployment. The problem frequently is not a lack of training at all, but a lack of available jobs. The society has only a limited number of jobs in which persons of average mental capacity can produce enough wealth to justify present-day inflated wage rates. In order to screen a large number of applicants for a small number of available jobs, employers require credentials such as high school diplomas or college degrees.10, 11 This is done even for jobs requiring no education beyond grade school. The purpose is simply to limit the number of applicants to the number of available jobs.12 In such cases, job training programs do nothing but increase competition for an already insufficient supply of jobs. The success of some individuals in acquiring sufficient credentials to qualify for a job merely means that someone elsewhere in the society will be laid off or find themselves unable to qualify for a promotion. Rising wages and, in particular, a rising minimum wages represent a moving employment threshold. Even if a few unemployed persons manage to overtake and pass this threshold, inevitably someone else will fall behind.
Handcraftsmanship and Personal Services
The distribution of most of the nation´s income through wages and salaries not only generates excessive pressures for job employment, but it distorts the nation´s production priorities by constricting the flow of income to a very narrow field of employment, namely capital-intensive labor. Most of the output of goods and services in a modern technological society results from scientific knowledge embodied in machines and complex productive processes.13 The fact that this wealth must be distributed primarily through wages and salaries dictates that the only way for persons with ordinary skills and talents to obtain a decent income is to work for industries with a high capital-to-labor ratio. Except for persons with special talents or rare skills, workers involved in personal service industries or in the production of handcrafted goods find it virtually impossible to compete in an economic system dominated by capital-intensive labor.
The unaided human craftsman or service person simply cannot create wealth as fast as a complex piece of automated machinery. Therefore, if the non-capital intensive jobs are paid solely on the basis of what individuals can produce alone and the capital-intensive jobs are paid on the basis of what people and machines can create together, it is inevitable that non-capital intensive jobs will die out. The economy will become structured so that virtually all attractive jobs are concentrated in capital-intensive industries or industries supportive of capital-intensive industries. Severe shortages will develop in the skilled handcrafts and personal services. This, of course, is exactly what has happened. Handcrafted goods and personal services have virtually disappeared from all technologically advanced societies. We are told that they are victims of progress and that it is inevitable that the more efficient must force out the less efficient, even at the expense of convenience and civility.
But is this really progress? Is it even efficient? Where is the efficiency in unemployment? What is accomplished by driving the handcraftsman and the small farmer out of business? Where is the gain in forcing people out of nearly self-sufficient lifestyles in rural areas and small towns and crowding them together in urban ghettos where unemployment is epidemic and welfare is the principal source of income? If there is no gain and if society receives no net benefit from these social dislocations, then there must be something basically wrong with the system that produces these results.
The present income-distribution system operates as if the output of automatic machines and high technology processes were exclusively attributable to those persons in society who are directly or indirectly involved in high technology industries. In essence, the salaries of workers in capital-intensive industries are subsidized by the wealth-producing capabilities resident in complex machinery and high technology processes. As a result, an entirely disproportionate number of people are drawn into jobs supportive of, or supported by, capital-intensive labor. Services that the society desperately needs are not performed simply because the wages are too low. At the same time that millions of people are doing make-work jobs in capital-intensive industries and other millions are desperately trying to gain entrance to this bloated segment of the economy, the society is seriously inconvenienced by the fact that there are insufficient service personnel for everything from auto and television repair to yard and house care. Service is poor, workmanship sloppy, and prices are exorbitant. Handmade goods are either shoddily made or incredibly expensive.
As long as the income-distribution system is structured so that virtually all income to the lower and middle classes is derived from wages and salaries, personal services and handcraftsmanship can never be a viable employment alternative for a significant number of people. High technology industry is where most of the wealth is created. Distribution of wealth through wages binds the labor force inexorably to these industries. Only when society´s needs for personal services rise to the point where employers are forced to pay wages comparable to those paid by capital-intensive industries can workers be found to perform the needed services.
Women´s Liberation
The distortion of social priorities resulting from constricting the flow of income to the capital-intensive sector is not limited to the effects on handcrafts and personal service industries. It has also created a situation of discrimination and injustice toward a great many citizens who through one reason or another do not fit into the capital-intensive sector of the economy. One of the most glaring examples of this phenomenon is the economic discrimination felt by women, particularly housewives. Certainly a great deal of the wealth that this society (indeed every society) enjoys is created by the labor of housewives who clean, shop, cook, chauffer, care for children, and perform numerous volunteer community services. It has been estimated that the average housewife performs $13,364 worth of such work each year (at 1970 wage rates). This amounts to roughly one-fourth of the Gross National Product.14 Yet the economic system does not pay wages for these services (unless, of course, they are performed outside of the woman´s own household). Housewives are expected to live off the money that their husbands bring home from the capital-intensive sector. They are thus kept economically dependent upon the generosity of their husbands. They share none of the prestige of having "earned" their money, even though they may work just as hard, or harder, at home than their husbands do at the office or plant. "Women´s work" carries a derogatory connotation that implies a lack of importance. Yet "women´s work" is critical to the stability of the social order and is certainly more important than much of the paper shuffling and petty office politics that passes for work in offices and executive suites throughout America.
Preachers and politicians often wax eloquent about how the hand that rocks the cradle rules the world, but the present economic system works to "keep women in their place." As long as virtually all wealth is channeled through wages paid by capital-intensive industries, it is inevitable that most of the social prestige and power will reside there too.
The Importance of Our Cultural Heritage
Modern society is complex and relies on many interdependent activities. In such a system, almost everything depends on everything else, and it is virtually impossible to determine precisely what activities are critical to the production of wealth or which are the most important. Certainly capital-intensive industry is where most material goods are formed out of raw materials. But there is a great deal of social overhead that is prerequisite to the very existence of a highly industrialized economy in the first place. The entire industrial-technological economic system rests upon a foundation of social stability that is nourished by a cultural heritage developed over centuries of hard and patient labor by free men and women alike and, in America´s case, by black slaves also. It is completely arbitrary to distribute wealth through wages and salaries as if the presently employed labor force were solely responsible for all the wealth created by the American economy. The output of present factories and businesses is no more solely due to the current salaried work force than the return of the Apollo moon rocks was solely due to the efforts of three human astronauts.
Figure III-1 suggests that most of the increase in economic output comes from productivity gains, not increased labor input.
Figure III-1. Increased output is primarily the result of increased productivity. Our rising standard of living is based on better tools and more efficient machines, not on harder work or longer hours.
A strong case can be made that most of the output of modern industry is not due to the presently employed labor force at all, but rather to the capital stock, the scientific, technical, and managerial knowledge, the educational training, and the social and cultural behavior patterns that have accumulated and developed over the past three centuries or more. 15
For example, the output of iron and steel tonnage per man-hour of labor increased 273 percent during the 1923-1950 period.16 Where did this increase come from? Judging from the fact that real wages paid to steel workers increased by about the same amount in the same time period, one might suppose that the increase derived from the steel workers themselves. But did it? Did steel workers in 1950 work 273 percent harder than their counterparts of 1923? This seems highly doubtful. Was the increase then due to better education on the part of the mill hands? Perhaps in part. However, there seems to be no reason to believe that a few years in school could have had such a phenomenal impact on a steel worker´s output. If that were the case, then surely steel-mill owners in the 1920´s would have found it economical to hire only college graduates to man their furnaces. Some of the increase was undoubtedly due to the fact that what the workers were taught in 1950, in school or on the job, made them more efficient. Surely, also, some better management techniques were employed. But this was part of the cultural development of society and due only marginally, if at all, to any efforts by the work force. The simple fact is that most of the increase in productivity in steel mills, as well as in other sectors of the industrial economy, are almost always due to increases in the amount of capital equipment and the sophistication of the machinery and techniques used in the manufacturing process. They are hardly ever the result of any specific efforts of the currently employed labor force.
The economist Solow calculates that ´less than half of the increase in America´s productivity per capita . . . can be accounted for by the increase in capital itself. Considerably more than half of the increase in productivity seems attributable to technical change – to scientific and engineering advance, to industrial improvements, and to ´know-how´ of management and educational training of labor.´ 17
And where does technical change come from? As defined above, technical change is the product of broad cultural developments not attributable to any single person or group. Not even the entire congregation of living scientists and inventors can claim sole credit for technical change. As any scientist or inventor knows, the person who is credited with a particular discovery or invention makes only a tiny incremental contribution to the totality of human knowledge on any subject or in any machine or device. For example, a new electrical machine for which an inventor receives a patent owes much of its wealth-producing capabilities to the enormous backlog of human knowledge concerning the properties of electricity and magnetism. This information has been accumulated over hundreds of years by scientists from many different countries. Thus, the major part of the wealth-producing knowledge embodied in any machine is derived from the culture itself, rather than from any single person or group of persons. As Isaac Newton once said, "If I have seen further than other men, it is because I stood on the shoulders of giants."
The wealth-producing capacity of a modern economy is the result of hundreds of years of discovery and invention, of building and educating, of rearing children and developing communities. Surely both women and men share in building the social stability and cultural development that makes our present industrial society productive. To distribute the wealth that this society produces almost exclusively through wages and salaries unjustly ignores the contribution of millions of persons who work outside of the formally recognized labor force and grossly distorts the system of values that society places on various types of culturally beneficial activity. The present income-distribution system should be recognized as a basic contributing factor in the failure of the national economy to realize its full potential in eliminating poverty and progressing toward a state of universal affluence. The narrow dependence on wages and salaries virtually guarantees high levels of unemployment and makes poverty inevitable. It wastes a large percentage of our available resources and productive capacity on make-work and unnecessary trivia. It leads to the demise of handcraftsmanship and personal services and discriminates against those who work outside the regular labor force. It is not surprising that an economic system with such fundamental defects should fail to produce up to its potential capacity.