On Fox News on Sunday November 18, Wyoming Congressman Liz Cheney referred to the agenda of the new Democrat House majority as “socialist”. She even went as far as to compare it to the Soviet Union:
I think the real Russia threat, Maria, is when you look at the kind of Soviet-style economic policy that the Democrats in particular, some of the freshmen coming in are advocating, government-provided jobs for everybody, government-provided housing for everybody.
The Soviet label is misplaced, but there is no doubt that the recent election allowed European-style socialism to make big inroads on Capitol Hill. Cheney’s warning about it is well taken, and underscored by the fact that Bernie Sanders disciples are taking over the Democrat party, both in Congress and at the state level.
This new movement has two distinctive features: it is obsessed with economic redistribution, and it thinks that economic growth is irrelevant.
I accounted for the anti-growth agenda in chapter 6 of my book The Rise of Big Government. It is a troubling idea on any day, but even more so when the U.S. economy may be heading for a slowdown. If these Democrat socialists get what they want, with big tax hikes and indifference to economic growth, our country will plunge into a deep crisis.
Sometimes, socialists try to defend their anti-growth agenda by saying that growth is harmful for the environment. The fact that our environment is increasingly clean and the U.S. economy becomes more energy efficient with growth, is of no consequence. Even the point that growth is good for the poor – brilliantly argued by Dan Mitchell – is lost on the left.
We could stop here and simply give up trying to understand the new socialists. Unfortunately, people do fall for socialist punditry, and the antidote cannot be to ignore those ideas. Instead, it begins with an understanding – and careful refutation – of their ideas.
When the left say that growth is unimportant, it is not because they dismiss it altogether. They just don’t think that growth can improve people’s living conditions. It is, of course, easy to counter this argument by explaining that lack of growth makes everyone equally poor, but the resistance to growth is it a resilient weed in the garden of economic thought. It is best defeated through an understanding – and careful refutation – of its theoretical foundations.
The origin of the anti-growth argument is a deliberate misrepresentation of David Ricardo’s 200-year-old theory known as the “iron law of wages”. In Ricardo’s original form, this theory stipulates two kinds of wages: the market wage, which is what workers are paid depending on the supply-and-demand conditions of the labor market; and the so-called natural wage.
The natural wage is what workers need to make in order to sustain themselves. It allows workers to buy whatever they need to eat, have a roof over their heads and keep themselves in good basic health. In short, it is the wage they need in order to be able to show up for work the next day again.
The key to the iron law of wages lies in the dynamic between the natural wage and the market wage. Suppose technological innovations improve overall productivity in the economy and wages start rising. The market wage rises above the natural wage and people’s standard of living increases. When the standard of living increases, people have more babies.
An expanding population is not a problem per se, but under Ricardo’s reasoning land is a fixed resource. With land as a fixed resource, food and housing become fixed resources as well. As population grows, so does demand for food and housing. An excess demand situation occurs that drives up food and home prices. As inflation takes a toll on the cost of basic living, the natural wage rises, eventually catching up with the market wage. When it does, the surplus that caused an increase in the population is gone.
This is a deterministic representation of Ricardo’s theory, and as such it does not give Ricardo full credit. He was not a determinist; he used the land-restriction point simply to explain how – in the very long run – the natural wage could come to increase and possibly restrict growth in the standard of living. With technological advancement, a staple of Ricardo’s reasoning, the gap between the market wage and the natural wage would continue to increase. As it does, it eventually eliminates the hardship of poverty.
Up to the point right before poverty elimination, the left is fine with Ricardo’s theory. Their problems start when the free market, through economic growth, can eliminate poverty.
That, of course, cannot happen. To prevent it, the left has perverted the Ricardian iron law of wages into what is known today as Marxist economic theory.
Like Ricardo, Marx defines a “subsistence” wage at which workers make enough to survive but nothing more; survival, again, is defined as “reproduction” of the labor force. Workers can eat, sleep, clothe themselves and stay healthy. The difference between Marx and Ricardo is that Marx makes people responsible for keeping the subsistence wage from rising. In his warped world, capitalists fight workers for the “surplus value” of production.
Whenever the market wage rises above the subsistence wage, a surplus is created. To keep workers from getting part of that surplus, Marx believed that capitalists maintained a “reserve army” of workers. They do this by regularly causing recessions, thereby filling the ranks of the unemployed until profits skyrocket again.
This is the theory upon which the American left builds its understanding of the economy. Hiding in this Marxist labyrinth of illogical sophistry, they propose steadily higher taxes and endless government programs for economic redistribution. Shielded from reality by their socialist liturgy, the left ignores every basic economic fact available to them. For starters, business profits do not rise in recessions, and businesses do not cause recessions through some kind of worldwide conspiracy.
There is more: unlike what Marxists will have us believe, business owners do not think of their employees as some sort of cattle that can come and go. They invest in their employees, train them, give them responsibilities, rely on them for productivity and quality – and reward them accordingly. A business owner who treats his employees the Marxist way will find his employees leaving for better opportunities.
Leftist economic thinking is neither logical nor empirical. It is an exercise in backward theorizing: define a political agenda, then invent a theory that can render a perception of credibility to it. That may work for academic conferences and coffee-shop agitation, but as a foundation for economic policy and other legislation, it is not only useless – it is dangerous.
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Image credit: DonkeyHotey | CC BY-SA 2.0.
