Sunday, February 1, 2015

HAWB 1783 - Benjamin Franklin on the Augmentation of Wages Occasioned by the American Revolution - How America Was Built

The United States was created as a self-governing republic at a time when all other nations and states in the world were ruled by monarchs, aristocrats, and oligarchs. Are there principles of political economy that should distinguish a republic from monarchies and oligarchies?

How history has been rewritten
Interestingly, most of today’s economic textbooks do not even consider the question. In fact, the leading introductory economic text book in use today, Principles of Economics, by H. Gregory Mankiw does not even mention Alexander Hamilton. or George Washington, or Thomas Jefferson. Mankiw does mention Benjamin Franklin, but only once. However, Mankiw discusses Ronald Reagan six times in his book. This is an example of the brazen conservative / neo-liberal bias of Mankiw, who was chairman of the Council of Economic Advisers under George W. Bush Jr., and then economic adviser to Mitt Romney during the 2012 presidential campaign. Yet, somehow, we tolerate conservatives and libertarians asserting that their extreme market fundamentalism is based on the ideas that created the United States. As I will show in this and the next few posts, their assertion is a bald faced lie.

Are there statements and writings by the Framers of the United States that deal with political economy? In fact, there are a great many, and they often involve some discussion of the general welfare and the common good. It should be noted that modern conservatives, neo-liberals, and especially  libertarians openly and explicitly attack the concepts of the general welfare and the common good as a subterfuge for would-be tyrants to impose a “statist” repression of economic liberty. See, for example, Frederick Hayek’s 1944 screed, The Road to Serfdom.

A fixation on "property rights"
The foundation of these conservative / libertarian ideas is that government has no business telling people what to do with their property. But in the United States, we fought a Civil War that was fundamentally caused by these ideas.  The horrifying whipping scene in Twelve Years a Slave, for which actress Lupita Nyong’o won an Academy Award, has one line near the end that captures the enormous cruelty and inhumanity of these conservative / libertarian ideas. When the slave Solomon Northup attempts to warn the slaveholder Epps that his brutal, hate-rage whipping of Patsey is a sin which will be judged, Epps pauses long enough to say, “There is no sin. A man does how he pleases with his property.”

No, in a republic, you cannot do with your property what you want. The crucial concept in the political economy of a republic is that self-interest must be balanced with the public interest. There is a reason the Framers included the term General Welfare, and with prominence, twice in the Constitution.

Franklin's Reflections on the Augmentation of Wages
In 1783, the year after he had helped negotiate a peace treaty with Britain to end the Revolutionary War, Benjamin Franklin wrote an essay “Reflections on the Augmentation of Wages, Which Will Be  Occasioned in Europe by the American Revolution,” which was published in Paris in the Journal d Economie Puplique. It is a deliberate and comprehensive attack on the “free trade” ideas of the house economists of the British East India Co., such as Adam Smith and Thomas Malthus.
...If the term wages be taken in its widest signification, it will be found that almost all the citizens of a large state receive and pay wages. I shall confine my remarks, however, to one description of wages, the only one with which government should intermeddle, or which requires its care. I mean the wages of the lowest class, those men without property, without capital, who live solely by the labor of their hands. This is always the most numerous class in a state; and consequently, that community cannot be pronounced happy, in which from the lowness and insufficiency of wages, the laboring class procure so scanty a subsistence, that, barely able to provide for their own necessities, they have not the means of marrying and rearing a family, and are reduced to beggary, whenever employment fails them, or age and sickness oblige them to give up work.

Further, the wages under consideration ought not to be estimated by their amount in money, but by the quantity of provisions, clothing, and other commodities, which the laborer can procure for the money which he receives.

....The horrible maxim, that the people must be poor, in order that they may remain in subjection, is still held by many persons of hard hearts and perverted understanding, with whom it were useless to contend. Others, again, think that the people should be poor, from a regard for the supposed interests of commerce. They believe that to increase the rate of wages would raise the price of the productions of the soil, and especially of industry, which are sold to foreign nations, and thus that exportation and the profits arising from it would be diminished. But this motive is at once cruel and ill founded.

....To desire to keep down the rate of wages, with the view of favoring the exportation of merchandise, is to seek to render the citizens of a state miserable, in order that foreigners may purchase its productions at a cheaper rate; it is, at most, attempting to enrich a few merchants by impoverishing the body of the nation; it is taking the part of the stronger in that contest, already so unequal, between the man who can pay wages, and him who is under the necessity of receiving them; it is, in one word, to forget, that the object of every political society ought to be the happiness of the largest number.

…. High wages attract the most skillful and most industrious workmen. Thus the article is better made; it sells better; and in this way, the employer makes a greater profit, than he could do by diminishing the pay of the workmen. A good workman spoils fewer tools, wastes less material, and works faster, than one of inferior skill; and thus the profits of the manufacturer are increased still more.

The perfection of machinery in all the arts is owing, in a great degree, to the workmen. There is no important manufacture, in which they have not invented some useful process, which saves time and materials, or improves the workmanship. If common articles of manufacture, the only ones worthy to interest the statesman, if woollen, cotton, and even silk stuffs, articles made of iron, steel, copper, skins, leather, and various other things, are generally of better quality, at the same price in England than in other countries, it is because workmen are there better paid.

The low rate of wages, then, is not the real cause of the advantages of commerce between one nation and another; but it is one of the greatest evils of political communities.

.... The rate of wages in Europe will be raised by yet another circumstance, with which it is important to be acquainted. I have already said, that the value of wages ought not to be estimated solely by the amount of money, nor even by the quantity of subsistence, which the workman receives per day, but also by the number of days in which he is employed; for it is by such a calculation alone, that we can find out what he has for each day. Is it not evident, that he who should be paid at the rate of forty pence a day, and should fail of obtaining work half the year, would really have but twenty pence to subsist upon, and that he would be less advantageously situated than the man, who, receiving but thirty pence, could yet be supplied with work every day? Thus the Americans, occasioning in Europe an increased demand and necessity for labor, would also necessarily cause there an augmentation of wages, even supposing the price of the day's work to remain at the same rate.

....Better days may come, when, the true principles of the happiness of nations better understood, there will be some sovereign sufficiently enlightened and just to put them in operation. The causes, which tend continually to accumulate concentrate landed property and wealth in a few hands, may be diminished. The remains of the feudal system may be abolished, or, at least, rendered less oppressive. The mode of taxation may be changed, and its moderated. And, lastly bad commercial regulations may be amended. The tendency of all these improvements will be, to enable the working classes to by the favorable change, which the American Revolution must naturally produce.
The government "should intermeddle"
Some thoughts on Franklin's ideas as they pertain to today:

Note that Franklin explicitly states that the wages of the great mass of people is an issue in which the government "should intermeddle." What else can this mean than direct government interference in the "free workings" of the labor market? Franklin's wisdom was unfortunately lost, and the country suffered thorough what has been called the Lochner Era of the US Supreme Court, when any attempt to protect the interests of workers was ruled by the justices to involve an unconstitutional infringement on the "property rights" of employers. See, for example, how the Court struck down a federally mandated minimum wage for the District of Columbia in Adkins v. Children's Hospital 261 U.S. 525 (1923). Or Hammer v. Dagenhart 247 U.S. 351 (1918), striking down laws prohibiting child labor.

The Lochner Era finally came to an end with the 1937 Supreme Court decision to uphold the minimum wage laws of the state of Washington, West Coast Hotel Co. v. Parrish 300 U.S. 379 (1937). The Parrish ruling at the time was seen to be the Court backing down in the face of President Franklin Roosevelt's plan to "pack the Court." Pundits at the time quickly dubbed the Parrish decision "the switch in time that saved nine." But it is important to remember the wider historical context: the enormous economic and social damage caused by the Great Depression made it impossible to ignore any longer the need for governments to curb the supposed "rights" of speculators, usurers, and exploitative employers. More specifically, there was widespread public outrage and revulsion over the Court's decision just under a year earlier to strike down the minimum wage law of the state of New York, Morehead v. New York Ex Rel. Tipaldo 298 U.S. 587. In his diary Secretary of the Interior Harold Ickes wrote that the Tipaldo ruling was "Positively medieval... The sacred right of liberty of contract again--the right of an immature child or a helpless woman to drive a bargain with a great corporation." The Knickerbocker Press in Albany, NY editorialized that "the law that would jail any laundryman for having an underfed horse should jail him for having an underfed girl employee." The public had had enough: it was clear that the problem was not the Constitution, but the nine old men in robes who insisted government had no power to protect the General Welfare by imposing limitations on the worst abuses and depredations of capitalists and financiers. In a book published a few months later, Storm Over the Constitution, Irving Brant, author of a monumental biography of James Madison, wrote that "A judiciary out of sympathy with the striving of the people for well-being does not constitute a restraint upon the turbulence and follies of democracy. It is a frustration of government; the negation of democracy; a stimulus to fascist or communist revolt." (Jeff Shesol, Supreme Power: Franklin Roosevelt vs. the Supreme Court, pages 221-230.)

Ever since, conservatives, libertarians, and neo-liberals have searched and schemed for ways to restore to the USA legal system the extreme "property rights" doctrines of the Lochner era. On the Heritage Foundation website, conservative propagandists  Economic Liberty and the Constitution: An Introduction, Paul J. Larkin, Jr., David E. Bernstein and others write "modern conservative and libertarian thinkers, especially the originalists among them, have taken great strides toward rebuilding traditional limited-government conservative constitutionalism. Part of that progress has involved recapturing some of the wisdom of pre–New Deal constitutional doctrine." It will be interesting one day to tally the billions of dollars that rich wannabe oligarchs poured into the Heritage Foundation and the other institutions of the conservative and neo-liberal movements such as the Mont Pelerin Society, to research and refine their incessant attacks on the concepts of the General Welfare and the common good.

The issue of a minimum wage
Franklin specifies that “wages under consideration ought not to be estimated by their amount in money,
but by the quantity of provisions, clothing, and other commodities” This is the proper way, in a republic with a healthy functioning political economy, to determine issues such as: What should be the minimum wage? (We brush aside as oligarchical panegyrics the answer of many conservatives and libertarians that there should not even be a minimum wage.) This is the essence of statecraft. Politics is the machinations and gyrations required to bring the answers of statecraft to fruition as actual policy.

In March 2011, Wider Opportunities for Women issued a report based on its Basic Economic Security Tables, developed in conjunction with the Center for Social Development at Washington University in St. Louis. Mo. The table below is from WOW's 2012 annual report (pdf).
Income needed, US, by type of household, from Wider Opportunities for Women 2012 annual report.

As New York Times correspondent Motoko Rich summarized the WOW report when it was released:
...a single worker needs an income of $30,012 a year — or just above $14 an hour — to cover basic expenses and save for retirement and emergencies. That is close to three times the 2010 national poverty level of $10,830 for a single person, and nearly twice the federal minimum wage of $7.25 an hour. A single worker with two young children needs an annual income of $57,756, or just over $27 an hour, to attain economic stability, and a family with two working parents and two young children needs to earn $67,920 a year, or about $16 an hour per worker.
Oligarchs' economic rent versus the capital intensity of a republic
We should be troubled that so much of Franklin’s essay can serve as a strong rebuke to U.S. economic and labor policies today – both government and corporate. Most especially, corporate. In February 2007, McKinsey & Co., the world's largest business consulting firm, was surprisingly forthright in a report entitled The new metrics of corporate performance: Profit per employee:
If a company’s capital intensity doesn’t increase, profit per employee is a pretty good proxy for the return on intangibles. The hallmark of financial performance in today’s digital age is an expanded ability to earn “rents” from intangibles. Profit per employee is one measure of these rents. ROIC is another. If a company boosts its profit per employee without increasing its capital intensity, management will increase its rents, just as raising ROIC above the cost of capital would. The difference is that viewing profit per employee as the primary metric puts the emphasis on the return on talent. This approach focuses the minds of managers on increasing profit relative to the number of people a company employs. It suggests that the most valuable use of an organization’s talent is the creation and use of intangibles.
McKinsey's "new" metric is actually just a return to the political economy of the slave- and opium-trading British East India Company. As I will show in a future post, the very notion of "rent" was repudiated by First Secretary of the Treasury Alexander Hamilton. The USA economy as Hamilton designed it, is supposed to become ever more capital intensive. Franklin's vision is the same as Hamilton; recall Franklin writing in the excerpt above: "The perfection of machinery in all the arts is owing, in a great degree, to the workmen." Further on in the his essay, Franklin writes (not quoted in excerpt above), that the "price of labor in the arts, and even in agriculture, is wonderfully diminished by the perfection of the machinery employed in them, by the intelligence and activity of the workmen, and by the judicious division of labor." In the political economy of a republic, the capital intensity of the economy should always be increasing. If it is not, it is a sure sign that usury, speculation, and economic rent-seeking have come to occupy too large a part of the economy. I shall revisit this theme often in future posts.

From Will capex come back? UBS Investment Research, by Andrew Cates, January, 10, 2013, page 3.


It is important to ask: How did we get from Franklin to Epps? Is the calamity and horror of human slavery a direct result of Franklin’s ideas, and actions, in creating the United States? Or is there another force? Another force that intervenes in the course of events to obstruct the flow of Franklin’s humanistic ideas and ideals, and thus prevent the more appealing and generous future Franklin’s essay seems to promise?

I contend there is. And moreover, that malevolent force continues at work today, and has achieved domination over the US  economic and political systems. That force has been open and explicit in attacking the concepts of the general welfare and the common good, and insisting that government is always the problem.

HAWB - Introduction - How America Was Built
The Introduction to this series, HAWB - How America Was Built, is here. The DailyKos version, which includes some good comments, including a preview of how computers were based on the various scientific research programs of the United States during World War Two, is here.

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