Why Capital Accumulation is Key to Raising Wages

By Jacob C. Maichel

"There are no other means by which the general standard of living can be raised other than by accelerating the increase of capital as compared with population" -Ludwig von Mises

It is clear that arbitrary minimum wage laws are not only ineffective, but actually detrimental to real wage growth. So what type of action results in increasing wages in the United States, or any country for that matter? The only way to raise real wages is to increase the per head quota of capital invested by increasing capital accumulation. To accomplish this it is first important to understand what is meant by capital accumulation.

Capital accumulation, as explained by Austrian Economist Ludwig von Mises, is wealth that is created and owned by businesses and individuals. This wealth is both saved and reinvested to create further profit. The capital which is accumulated is encompassed in everything that businesses utilize from tools to finished goods, and everything in between. Both individuals and businesses create further profit by loaning out excess wealth (either through direct investment or holding money in traditional savings accounts). It is important to note this accumulation can only occur when more wealth is created and saved than that which is consumed.

With the understanding of how capital accumulation works we can now examine how it will increase real wages. It is critical in this discussion to break down the commonly held belief that wealth and the creation of wealth is zero-sum. It is fallacious to assume the wealthy getting richer makes the poor worse off. Instead this wealth creation makes everybody better off! The standard of living in the United Sates is higher than anywhere else in the world not because our politicians are superior to their foreign counterparts, but instead because of the high per head quota of capital that is invested. This high level of investment has allowed businesses to use the most efficient tools available through capital investments, and this is why United States workers are so productive. Other countries do not lack the intelligence to grow but suffer from inadequate capital needed to drive higher efficiencies which lead to increasing production yields. As the accumulation of capital becomes larger wages will raise as businesses compete for the most skilled workers. Only through the free market can wages increase for everyone, rather than the lucky few who benefit from minimum wage laws. 

The best way for government to encourage capital accumulation is to leave the market alone. Manipulating interest rates and the money supply through the federal funds rate or monetary policy sends the wrong signals to businesses. As the interest rate artificially drops and encourages borrowing individuals will save less and business will take on projects they would have not pursued otherwise. These malinvestments, as Mises calls them, are the direct cause of government intervention and detrimental to the accumulation of capital. Examples of malinvestment are present all over the world, from the United States housing bubble to unfinished sky scrapers such as the Nakheel Tower in Dubai. 

Another strong way to encourage capital accumulation is through lowering tax rates, particularly for corporations and wealthy individuals. Although this may be counter-intuitive for some who think that it is the governments role to redistribute excess wealth to help the common man, this is not the case. In Planning for Freedom: Let the Market System Work Mises states the following:

"United States were in the last decades directed toward confiscating ever-increasing portions of the wealth and income of the higher brackets. The greater part of the funds thus collected would have been employed by the tax-payers for saving and additional capital accumulation. Their investment would have increased productivity per man-hour and would in this way have provided more goods for consumption. It would have raised the average standard of living of common man. If the government spends them for current expenditure, they are dissipated and capital accumulation is concomitantly slowed down."  

The tax payers or businesses are able to save and invest more if they are taxed less, or not at all. Although this does make them more wealthy, it does not make the common man more poor. Instead from a material perspective everybody prospers. By allowing wealth accumulation resources are enabled to flow into their most efficient use, dictated by consumer demand, instead of bureaucrats deciding how money is transferred. The following graphic from Tax Foundation is a perfect illustration of Mises' argument, lower taxes results in increased production and wages.

 Anti-growth policy and propaganda has been incredibly strong in attempting to destroy Austrian Economic ideals, particularly in the recent years. We are continually told that wealth is a bad thing when clearly that is not the case. The most effective way to increase production and the standard of living to promote wealth creation and saving by leaving the free market to it's own devices, unfettered by interventionist policy. A laissez-faire approach does not strictly favor the wealthy capitalist, but rather the interests of the common man.

Jacob C. Maichel is a Graduate Assistant at the Gwartney Institute and an MBA student at Ottawa University

Why Minimum Wage Laws Are Not the Answer

By Jacob C. Maichel

"Minimum wage laws [are] one of the most effective tools in the arsenals of racists everywhere"
-Economist Walter Williams

Minimum wage laws are likely some of the most misguided public policies that exist in the United States. I am incredibly sympathetic to the plight of the poor, but supporting a government mandated price fixing scheme not only creates distinct winners and losers but promotes very perverse outcomes for many vulnerable groups. Furthermore, the idea that a minimum wage is the key to lifting people of out poverty is clearly a logical fallacy. Why not make it law that everyone must be paid no less than $2,000 an hour? Then everyone would make over $4,000,000 annually and poverty would be abolished, right? Well no, instead the only people who would remain employed are those who create at least $2,000 of value an hour for their employer, a small fraction of the workforce. For businesses to be able to support this ludicrous minimum wage they would have to significantly reduce the workforce, likely with large increases in automation. Although the U.S. federal minimum wage is not $2,000, but instead $7.25, these artificially inflated wages do raise the incomes of some low skilled workers at the expense of eliminating the income for all who can not find work as a result. 

Generally I think people who advocate for minimum wage laws mean well but likely have a fundamental misunderstanding of the topic. Pleas for a living wage are not new by any means. Saint Thomas Aquinas believed that commodities (farm products) should demand a fair price and workers should be paid a sufficient income to support themselves. In this time period, however, this was unachievable as the majority of people lived very minimally and often survived off of their own food production. The idea of a "just wage" or "living wage" really gained a resurgence of popularity during the industrial revolution. Social reformers of the time believed that it would be more beneficial for children to be in school, rather than working for low wages in dangerous conditions. This belief led to the creation of the first minimum wage laws in the country. 

In 1912 Massachusetts passed the first minimum wage laws the U.S. had ever seen, although they were only pertinent to women and children. This was largely in response to a fear that unskilled workers who were payed low wages were taking the jobs of adult men. The idea behind the law was that by forcing employers to pay unskilled workers similar wages to skilled workers employers would opt for the latter, protecting the working man from competition. Many states followed Massachusetts' example, but these laws were shortly lived as the United States Supreme Court ruled them unconstitutional for violating the principle of freedom of contract.  The repeal of these laws was largely ignored as the country prospered in the 1920s. High demand for workers coupled with tightened immigration allowed for competition within the market to allow wages and working conditions to naturally improve with no coercion from outside forces. 

In 1929 the unemployment rate in the U.S. was roughly 3.14% compared 24.75% in 1933. As wages across the nation began to decrease the desire for a guaranteed minimum wage again resurged. Unfortunately, the underlying ideology for the justification of the laws seemed to shift from getting children out of the workforce to instead guaranteeing a "living wage" to those who were employed. What is misunderstood about this situation is that even though many with jobs were making less, if wages remained where they had been in the 1920s many more people would have been without a job. In 1933 the New Deal's National Industrial Recovery Act (NIRA) promised a minimum wage. This was largely a failure as it only increased the wages of unskilled workers, who already struggled to find gainful employment, not the wages of skilled workers who already were paid above the minimum wage. Rather than stimulating recovery, it appears to have made it harder for unskilled laborers to find work. The NIRA lasted only two years before it was deemed unconstitutional as well in 1935. It was replaced by the Fair Labor Standards Act in 1938 and since then the U.S. has had a minimum wage. 

The Fair Labor Standards Act did not impact the labor market in a significant manner. Once the U.S. began to militarize in the 1940s the wartime economy increased wages far above the minimum wage. It remained this way until 1956 when Congress significantly increased the minimum wage and authorized the U.S. Department of Labor to conduct surveys to increase compliance amongst employers. Teenagers have always had higher unemployment than adults but after 1956 there was an incredible proliferation in teen unemployment, illustrated in the graph below. 

Teenagers typically have the least amount of marketable skills other than the unique value they possess of being able to work for low wages. Without this advantage many lost their jobs to more skilled laborers in the short term and the long term impact of automation is starting to be realized more and more. 

Perhaps more alarming is the power these minimum wage laws grant employers to discriminate in hiring. As wages increase and businesses reduce their workforce, this creates a surplus of individuals looking for employment. Economist Thomas Hall in Aftermath: The Unintended Consequences of Public Policies explains very clearly that discrimination is very difficult when the amount of applicants is similar to the amount of job vacancies determined by the market. As this surplus increases it empowers employers to increasingly choose employees based on personal preferences, including race. Historically, black teens have had a higher unemployment than their white counterparts but after the 1956 wage increases it became exceedingly worse. This can be seen in the following graph depicting the difference in unemployment rates in black and white teenagers before and after the 1956 wage increases. 

It is hard to deny that minimum wage laws are clearly government-mandated price fixing schemes that create distinct winners and losers. It's ironic that labor unions and politicians that call for higher minimum wage laws forget why they were enacted in the first place; to force unskilled laborers (largely children) out of the workplace. This has greatly impacted the most vulnerable groups of workers, namely teenagers, and steals valuable experience they need to be successful in gaining future work. Although many people who support these laws have good motives, the road to hell is surely paved with good intentions. Supporting these laws seem good in theory but in practice they not only promote a slew of dangerous outcomes, but can explicitly allow racist hiring behavior. 

Jacob C. Maichel is a Graduate Assistant at the Gwartney Institute and an MBA student at Ottawa University