The Progressive Critique of Free Markets: A Response | Part 4

The Charge of Worker Exploitation: Labor Unions and the Minimum Wage

In the late 19th-century, America’s free-market economy featured strong protections for private property and contract rights, prices of goods and services determined by supply and demand, and very little government intervention. Wages and prices were unregulated, as were most business operations. Government intervention was largely confined to stopping uses of property deemed harmful to others, under the long-standing sic utere doctrine, according to which people were forbidden from using their property in ways that injured the rights of others. As a result, the economy grew very rapidly during this time, and standards of living improved for everyone. However, economic gains were very unevenly distributed, prompting progressive critics to seek changes.

Progressive political economists made a number of arguments against free markets that gained increasing support among politicians, journalists, academics, clerics, and ordinary people, and eventually led to economic and political reforms of the free-market economy. These critics believed that workers were being exploited by businessmen on the grounds that they could force workers to accept low wages.

The political circumstances of the time seemed to confirm Progressives’ assertions. Because there were so many industrial workers available for hire—some coming from Europe in wave after wave of immigration in the decades before World War I, others moving from farms to urban areas—employers were provided with an abundance (and even an overabundance) of workers. In consequence, workers were forced to compete against each other for an occasionally scarce supply of industrial jobs. This had the effect of driving down some wages. Progressives complained that because wages were determined strictly by the free-market law of supply and demand, there was no necessary connection between wages and the cost of living. As the progressive economist John R. Commons put it:

The product of labour in all enterprises, like the product of the other factors of production, is subject to the law of diminishing returns. The larger the supply, the lower will be the value of the marginal product compared with the labour of producing it. Hence, whatever controls the supply of labour of a given class controls the marginal value of its product, and thereby the wages of the producers. The rate of wages is not determined by the cost of living.

Because workers could be paid less than what it cost them to live, the free market was accused of failing them in the most palpable and self-contradictory way possible: It was an economic system that failed to meet their most basic economic need for survival.

Progressives proposed an end to wage competition by means of labor unions. Unionized collective bargaining would prevent businessmen from playing workers against of each other and pushing down wages. The progressive political economist Simon Patten expressed the view that unions should be used “to secure the rewards of his work to the common laborer.” Put plainly, unions were needed to prevent workers from being cheated. Underlying this view of labor relations was the belief that workers and businessmen approached each other with unequal economic and, therefore, unequal bargaining power. Because workers were poorer than businessmen, they could not hold out for higher wages for very long without starving. This made them powerless and prisoners of their elemental fear of suffering and death. Such men could not be said to be truly free; they were more properly described as coerced by their fear. As the progressive legal reformer Roscoe Pound wrote, favorably quoting Lord Northington: “Necessitous men are not, truly speaking, free men, but, to answer a present exigency, will submit to any terms that the crafty may impose upon them.” Commons described their condition as one of “wage-slavery,” or “the dependence of one man upon the arbitrary will of another for the opportunity to earn a living.” By contrast, prosperous businessmen could use their greater wealth to outwait recalcitrant workers. Because workers were exploited by businessmen operating within the rules of the economic system, they were coerced by the system itself, that is, by free-market economics. What to free-market defenders seemed like an equal right to private property and voluntary contracts was to Progressives an immoral, systemic regime of coercion that indicted free-market economics to the core.

Today’s critics of free markets continue to echo the early progressive moral arguments against worker exploitation. They argue that lower-end workers must unionize if they are to prosper. Where unionization is difficult, they advocate for a substitute—the $15 per hour minimum wage. This proposal (already adopted by some cities and states) is meant to raise low-end wages in the face of economic stagnation and wage competition.

Progressive Era proponents of unionization did not understand that unionization intended to increase wages above the free-market rate had the effect of decreasing employment. They believed that employers could simply set wages higher if they wished. And yet, the same economic principles that caused Progressives to reject wage competition could be used to show that, in the absence of productivity increases, unions increase the cost of employment to the employer, thereby reducing employment. Workers then and now left unemployed by unionization are the hidden victims of this progressive reform.

Since the dawn of the industrial age, the path to prosperity for ordinary workers has been by way of increased productivity (that is, increased output per unit of input), not unionization. The same economic and moral logic that argues against unions can be applied to increases in the minimum wage. The hidden cost of a minimum wage is higher unemployment among some of the most vulnerable Americans—those without the work experience or training to warrant that wage. The economic cost of unionization and the minimum wage is simultaneously a moral mark against these forms of intervention.

Despite (or perhaps because of) the economic arguments against efforts to boost wages through unions and the minimum wage, the early Progressives (and many Americans since) were seen to have properly indicted the morality of the free market for sometimes not paying workers a living wage. It is certainly true that many workers at that time were not paid enough to get by. But here the progressive critique was exaggerated because it measured individual instead of household income combined with support from other sources, such as family members and neighbors. Furthermore, over time workers could gain experience and skill or benefit from productivity increases—and then earn higher wages. These were voluntary and therefore morally untainted methods of advancement.

Progressives were aware of some of these responses and rejected them. For example, Patten countered that “[d]ifficulties in towns are too massive to be surmounted by the altruism of such service as can be rendered by the mutual aid of family members and of neighbors.” Patten was at least partly correct. Urbanization led to an excess supply of labor and had in some respects made life more difficult for workers. As Ely pointed out, in early America, “independent farmers who tilled their own soil” could support themselves and thereby avoid being at the economic mercy of others. Moreover, “an abundance of unoccupied land furnished [a ‘hired man’] a frequent escape from his subordinate position.” Poverty was in some respects easier to bear in the agricultural economy that preceded the industrial economy. As Patten put it, the “poverty men of the country had some options in nature during the seasonal periods of plenty.” In that sense, they were more autarkic than urban dwellers, who had only their wages and who were therefore more vulnerable to unemployment.

But the economic vulnerability brought about by industrialization and urbanization was only part of the story. As even Patten acknowledged, pre-Industrial Era farmers were poor. As America industrialized, such men voluntarily urbanized in order to improve their material condition. Industrialization produced unquestionable benefits for millions of ordinary Americans, and so it was a great moral victory in the age-old struggle against poverty. All the same, urbanization then and now reveals a clear need for some way to ensure that the most vulnerable Americans do not starve in the event that their family and friends cannot help them during hard times. But unionization and the minimum wage were problematic solutions because of their harmful effects on vulnerable workers seeking employment.

Ideally, free-market defenders would have provided a persuasive alternative to Progressivism at the time. Had they done so, they might have halted the progressive intellectual advance and directed the political system toward free-market solutions to the problems of industrialization. But the absence of powerful defenders of the Founders’ regime in that generation, especially in the academy, meant that the Supreme Court remained the only bulwark capable of arguing against progressivism.

In the period during and just after the Progressive Era—until it was broken by President Franklin Roosevelt and the New Deal—the judiciary harbored some of the most principled and thoughtful defenders of the Founders’ vision of economics. Regrettably, the judiciary had a limited intellectual visibility and influence. All the same, in a particularly important case, the Supreme Court turned away an attempt by progressives in Congress to institute a minimum wage for women in Washington, DC, by way of the Minimum Wage Act of 1918. That act was ruled unconstitutional in Adkins v. Children’s Hospital. Writing for the majority, Justice George Sutherland acknowledged that some women need income support. But as a means to achieving this, he deemed the minimum wage unjust:

To the extent that the sum fixed exceeds the fair value of the services rendered, it amounts to a compulsory exaction from the employer for the support of a partially indigent person, for whose condition there rests upon him no peculiar responsibility, and therefore, in effect, arbitrarily shifts to his shoulders a burden which, if it belongs to anybody, belongs to society as a whole.

He continued: “Certainly the employer, by paying a fair equivalent for the service rendered, though not sufficient to support the employee, has neither caused nor contributed to her poverty. On the contrary, to the extent of what he pays, he has relieved it.” In other words, it is not the employer’s fault that the employee is poor. Her wages, however low they might be, are just because they represent the value of her labor. And yet the employer is unjustly made to bear the full burden of rescuing her from poverty—beyond the wages that he is already paying her and that take her part of the way to solvency. The responsibility for raising her income should instead fall to society, because the moral obligation to prevent her from starving does not rest solely with her employer.

Sutherland’s moral analysis indicates that some form of minimal public welfare, and not the minimum wage, is a more appropriate and just response to the presence of degrading poverty. In his decision, Sutherland argued that unions are a constitutionally permissible way to increase wages. He presumably had in mind purely voluntary unions that do not seek coercive methods to prevent non-union laborers from taking their jobs. Coercive unions are an unjust imposition on the employer because they forcibly prevent employers from firing unionized workers at will and substituting willing, non-union workers. If workers cannot earn a living wage by means of individual employment or voluntary unions, a more just and moral alternative remains direct income support, if necessary, in the form of minimal public welfare.

About the Author

Luigi Bradizza, PhD, is Associate Professor of Political Science at Salve Regina University and the author of Richard T. Ely’s Critique of Capitalism.