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Milton Friedman

The Ethics of the Labor Market

by James T. Bennett*, Professor of Economics, George Mason University, Fairfax, VA 22030, USA (Lecture-speech delivered at the 1st International Conference-Workshop "Ethical Foundations of Economy" , Krakow Oct. 13, 03 ) 

The .Internet Web Page of the Polish-American Foundation for Economic Research and Education begins with a fascinating and insightful statement by Jan M. Malek, the organization's founder and leader: "Thou Shalt Not Steal!" in the broadest sense of this injunction is the fundamental and most important economic imperative. Compliance with it by governments, as well as by those governed, is the main condition for economic progress and for prosperity.

This statement contains important ideas about what constitutes an ethical labor market. Ethics, in my view, however, goes far beyond the command "do not steal." According to my dictionary, ethics is involved with a set or moral principles or values. With regard to labor and the market for labor services, we are dealing with people and their role as employees and workers in society. So an ethical labor market requires that employees and workers be treated "morally," that is according to a standard of "right" behavior. It is both interesting and significant that all the major religions of the world express great concern for those who are poor and needy -- those on the bottom steps of the economic ladder. The unfortunate are given sympathy and praise. In contrast, most religions tend to view the wealthy with suspicion. It seems that the rich are perfectly capable of taking care of themselves, but the poor are in need of help and deserve compassion and the opportunity to improve their condition. Thus, when we view the ethics of the labor market, we must be concerned primarily with how the institutional arrangements of the labor market help or hinder the poor and the unfortunate.

When we talk about institutional arrangements, we must turn to government who establishes and enforces the rules of the economic game in labor markets and other markets as well. Mr. Malek clearly views government itself with suspicion, for his statement that I quoted earlier obviously implies that governments steal, and to steal from the poor and unfortunate would be truly unconscionable and reprehensible. In addition, democratic as well as other types of governments throughout the world have always claimed to be the friends of the poor and the unfortunate - after all, the poor outnumber the wealthy by a large margin, so to claim otherwise would be an admission that the large majority of the population is exploited to benefit those relatively few who are already rich. Governments always claim to be ethical and moral institutions that seek the greatest good for the greatest number.

But, as Mr. Malek's statement suggests, this claim deserves careful examination. We can learn a great deal by thinking about some simple notions and exploring their implications. Let us consider how government often functions in the labor market.

First, government often claims to "create" jobs, a positive and welcomed action that offers employment opportunities. But, how can government accomplish this? A job provides income and opportunities, i.e., ajob is something that has VALUE. A job is VALUABLE and is an ASSET.

Look at it this way: If I were unemployed and poor, would I be willing to pay $10,000 for a job that would give me an income of $50,000 a year? Of course I would, because I would be richer by $40,000. So, if government could CREATE jobs, it could raise its revenues by SELLING JOBS to those who need employment. In fact, if government could - by passing laws and making regulations -- create things of VALUE, there would be no need for taxes. Government revenues could be provided from the sale of assets that laws and regulations create. No government has ever raised its revenues by selling assets created by laws and regulations for a very simple reason: GOVERNMENT CANNOT CREATE WEALTH. What a wonderful world we would live in if only government could create wealth by passing laws that created wealth. There would be no poverty in the world; we could all be rich as our enlightened politicians voted to create assets and sell them!

So, clearly, government cannot create wealth or jobs or employment opportunities for its citizens out of nothing. The very best government can do is to transfer wealth or jobs from one group to another in society. Thus, our first critical observation is that all governments exist to TAKE from one group in society and GIVE to other groups. Some individuals win -- those who get the jobs and the incomes when government acts to "create" employment -- and other individuals lose - those who must pay and bear the burden when assets are taken from them and given to someone else. The next issue that we must consider is WHO WINS AND WHO LOSES when government transfers wealth from one group of people to another? Government tells us that its primary concern are the poor and the downtrodden in society -- the unemployed, the hungry, the sick, the homeless, the unfortunates. But is this true? In the United States and in many other countries, for example, vast sums of money over many decades have been spent on a huge number of programs designed to address every conceivable social ill. But, despite the spending, little progress seems to have been made in solving these problems. Indeed, observation often tells us that government intervention often makes a problem worse rather than better. What is wrong?

What is wrong is that the WEALTHY in society benefit at the expense of the poor when government becomes involved in economic decision making. This simple idea comes from the essential nature of politics. MONEY is the lifeblood of politics; the poor do not have the resources to make financial contributions to politicians, so the poor have no political clout. The wealthy special interest groups essentially have control of the political process. So, when government enacts programs purportedly to aid the unemployed, the ill, the hungry, the homeless, or any other social problem, very little of the money ever reaches those in need.

Most of the funds are directed to the politicians' friends as "payback" for financial contributions and political support. Put simply, in all nations and at all times, government has functioned to transfer wealth from those who are LESS FORTUNATE to those who are MORE FORTUNATE. In the U.S., the political Left condemns the Reagan and George W. Bush Administrations by claiming that during the twelve years that these presidents were in office "the rich got richer and the poor got poorer." Of course, the Left is correct. Government spending rose substantially during the Reagan and Bush years, and the wealthy in society were the primary beneficiary of government, just as we would expect. Government should be primarily concerned with helping those who cannot help themselves - those at the bottom of the economic scale. The rich, obviously, can take care of themselves. Those who really CARE about the poor and want to provide economic opportunities for the poor should demand LIMITED GOVERNMENT. A large, powerful government means that political decision making has replaced market decision making. With political decision making, WHO YOU KNOW (political connections) is much more important than WHAT YOU KNOW. And, the poor, by definition, have no political connections, so they are deprived of employment and other opportunities to advance themselves.

Another important institution in the labor market is the labor union.

Labor unions always claim to benefit ALL WORKERS, but unions are just another special interest group that seeks to transfer wealth and income to their members. Unions are powerful political organizations, and when politics come into play, those who are politically active and well-organized always benefit at the expense of those in society who are not politically active and are unorganized. The poor are rarely politically active and are never organized effectively, for organization itself requires money, resources, and talent that the poor do not have.

Thus, government and unions play a major role in the market for labor, and that role cannot be described as moral or ethical, for governments and unions do not operate to help those who are at the low end of the economic scale but those at the highest levels. Just think about it: Have you ever known a poor politician or a poor official of a labor union?

With this perspective on the roles of government and unions in the labor market, we can better understand and appreciate Mr. Malek's insights about theft by government. The distinguishing characteristic of government is that government is the one institution in society that may legally use coercion to achieve its goals. If, for example, you do not pay your taxes, you can be sent to jail by the government. When government TAKES from the POOR and GIVES to the RICH, it is presumably legal because government always decides what is "legal" and what is not legal. But, we know that such actions are neither ethical nor moral.

When PERSON A -- whether person A is rich or poor -- uses coercion to take something from PERSON B -- whether person B is rich or poor -- we call this act THEFT. It is STEALING. When government does this, we call it TAXATION because what government does is always by definition legal ~- even if not ethical or moral. But even if legal, unethical or immoral acts by government, as Mr. Malek clearly recognizes, has serious economic consequences.

According to Mr. Malek, compliance with the dictum "Thou shalt not steal" by both governments, private institutions, and individuals is the "main condition for economic prosperity and progress." How can this dictum be so critical and so fundamental? The answer is not at all complex. When government TAKES from Person A and GIVES to Person B, the incentives of both Person A and Person B are seriously distorted in a way that discourages economic progress and prosperity.

First, think about what happens to Person A. The more the government taxes his or her income, the more government penalizes work effort. People do not like to work only to have the fruits of their labors distributed to someone else. When political connections rather than productivity determines who gets what jobs and what incomes, emphasis will be given to politics rather than to producing goods and services. People are not stupid: They learn quickly whether their efforts are adequately rewarded and whether or not hard work produces higher incomes. If work is discouraged, economic progress cannot possibly occur and prosperity will never come.

Second, think about Person B, the person who the government favors with jobs and income transfers. Once person B learns that the political process can be used to obtain wealth and income from others, those who benefit from government activity have enormous incentives to devote their time and effort to political activity. Attempting to manipulate government and trying to influence politicians does not produce goods and services that benefit the economy. Political advocacy and lobbying involves trying to manipulate how the total output of the economy - the economic pie -- is divided among various groups rather than producing goods and services that INCREASE THE SIZE of the economic output. Resources expended in lobbying and influencing government are not available to produce goods and services, so economic progress and prosperity must inevitably suffer. Indeed, increasing the SIZE of the economic pie is what is meant by economic progress and prosperity. From this simple, common sense analysis we can easily see that as government gets larger and becomes more involved in the labor market, the greater the harm done to employees and to the economy as a whole. As government grows, so does the bureaucracy through which it functions. As the great Austrian economist, Ludwig von Mises, argued so clearly in his classic book, Bureaucracy, bureaucracies are always inefficient, and bureaucratic methods protect the status quo. In effect, bureaucracies resist CHANGE; bureaucratic methods emphasize seniority rather than ability; bureaucrats stress routine, and this inhibits innovation; and hard work and high levels of output are discouraged because they are not rewarded in bureaucratic workplaces. Large governments and the bureaucracies that they engender slow economic progress and impede prosperity. the same type of logic applies to labor unions which are a special interest group that seeks to use the power of the state to benefit their members at the expense of others in society who are not members. Both government and unions introduce rigidities into the operations of labor markets by enacting laws and putting in place regulations that benefit special interest groups, and these rigidities inevitably raise the cost of production which, in turn, makes the nation's goods and services less competitive in world markets and more costly to consumers. As production costs rise, jobs are lost as economic activity moves to lower cost locations. Increasingly, work is moving around the world where production costs are lowest. The poor, who are generally unskilled, suffer disproportionately from job loss, for a skilled worker can step down and take the position of an unskilled worker, if necessary, but the unskilled worker cannot step up the economic ladder and take a job that requires skills that the poor person does not have. Prosperity is the result of economic progress; economic progress occurs, by definition, when there is innovation, creativity, and change. Innovations permit a larger quantity of goods and services to be produced with the same levels of resource inputs. Because government does not reward innovation, creativity, and change, and because bureaucracy actively discourages these essential ingredients of economic growth, when government intervenes in the market for labor and into other aspects of the economy as well, prosperity and progress inevitably suffer. Always, it is the poor who are affected most by economic adversity -- the rich can rely on their wealth to survive economic storms.

Economic progress and prosperity are especially critical to improving the economic status of the poor. Prosperity benefits everyone but the poor gain far more than the rich in a relative sense, for their needs are greater. Prosperity and progress are the source of new jobs and new, better, and less expensive products and services. The poor are always better off with lower prices and more abundant choices. So when governments and politically powerful interest groups such as labor unions engage in activities that slow economic progress and reduce the prospects for prosperity, economic opportunities are taken away from the poor which typically benefit the special interests, the government itself, a form of theft has occurred. Because government is the institution through which the market for labor is manipulated, government has violated Mr. Malek's basic injunction: "Thou shalt not steal!" And, what is worse, when individual thieves steal, they typically take from the rich, but when government steals, it takes from the poor so that those in government and the rich who have political influence can benefit!

Government has a role in society - an important one - but a very limited one. Government should make and enforce the rules of the economic game, but not allow the politically powerful to use those rules to benefit themselves at the expense of the poor. What evidence can I offer that my arguments are valid. There is, in fact, abundant and compelling evidence to support my claims that heavy government involvement in economic markets have serious negative economic consequences. The Heritage Foundation in Washington, D.C. and the Wall Street Journal which have collaborated to produce an annual volume called the Index of Economic Freedom. This index is used to rate the economic freedom of 150 nations in the world and to study the relationship between economic freedom and prosperity.

The most critical and consistent conclusion from this research year after year is that highly controlled or repressed economies have far below-average living standards and are not prosperous. Such nations as North Korea, Cuba, and Laos fit this description. The economies of these nations are disasters, and as always, the poor bear the brunt of the hardships.

Nations with relatively free economies where government is limited, on the other hand, are prosperous and enjoy high rates of economic growth - for example, the United States, New Zealand, Hong Kong, and Singapore are good examples. It is essential to understand that economic prosperity does not depend on having a wealth of economic resources. Hong Kong is virtually devoid of natural resources and must import most of its raw materials, but has been very successful economically - as has Japan and South Korea. What is vital is how well the people are encouraged to produce, and a free economy provides the proper incentives.

Most important, however, is that Mr. Malek's injunction against theft by government is, indeed, the fundamental and most important imperative.

James T. Bennett

* James T. Bennett is an Eminent Scholar at George Mason University and holds the William P. Snavely Chair of Political Economy and Public Policy in the Department of Economics and is Director of the John M. Olin Institute for Employment Practice and Policy. He received his Ph.D. from Case Western Reserve University in 1970 and has specialized in research related to public policy issues, the economics of government and bureaucracy, labor unions, and health charities.
He is the founder and editor of the Journal of Labor Research and has published more than 60 articles in professional journals such as the American Economic Review, Review of Economics and Statistics, Policy Review, Public Choice, and Cato Journal. His books include The Political Economy of Federal Government Growth (1980), Better Government at Half the Price (1981), Deregulating Labor Relations (1981), Underground Government: The Off-Budget Public Sector (1983), Destroying Democracy: How Government Funds Partisan Politics (1986), Unfair Competition: The Profits of Nonprofits (1988), Health Research Charities: Image and Reality (1990), Health Research Charities II: The Politics of Fear (1991), Official Lies: How Washington Misleads Us (1992) and Unhealthy Charities: Hazardous to Your Health and Wealth (1994). He is an adjunct scholar of the Heritage Foundation and a member of the Mont Pelerin Society and the Philadelphia Society. 

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