The Dirty Secret of Economic Efficiency
Posted on: 03/03/2020 06:54 PM

by John Young

Fountains that once flowed and sparkled in the sunshine to the delight of children are now clogged with debris.

The goal of economic efficiency is broadly accepted, especially among Republicans and “conservatives” as adequate justification for any number of decisions by businesses, as well as national decisions pertaining to trade and foreign policy. The goal is accepted without question, with an underlying implicit assumption of its goodness.

But one thing we’ve always done here is question everything, and the underlying assumptions of economic efficiency do not hold up to scrutiny.

Adam Smith’s “The Wealth of Nations” is presented as the pivotal text in support of these ideas. But, as is often done with any text used to support decisions, it is used without proper context. This happens with texts as varied as the Bible and the U.S. Constitution as well. These are quoted selectively, and their true context ignored, to support many things contrary to their true context and spirit, such as oxymoronic Christian Zionism or the belief that the Second Amendment was intended to guarantee the right of government forces to have guns – as if government forces would ever need such a guarantee.

Of course, it is easy enough to misrepresent such works when very few people have actually fully read and understood them.

Adam Smith is no different. Here are a couple of quotes from The Wealth of Nations you are unlikely to hear from anyone today.

“The superiority of the independent workman over those servants who are hired by the month or by the year, and whose wages and maintenance are the same, whether they do much or do little, is likely to be still greater.”

“Masters are always and everywhere in a sort of tacit, but constant and uniform, combination, not to raise the wages of labour above their actual rate. To violate this combination is everywhere a most unpopular action, and a sort of reproach to a master among his neighbours and equals. We seldom, indeed, hear of this combination, because it is the usual, and, one may say, the natural state of things, which nobody ever hears of. Masters, too, sometimes enter into particular combinations to sink the wages of labour even below this rate. These are always conducted with the utmost silence and secrecy till the moment of execution; and when the workmen yield, as they sometimes do without resistance, though severely felt by them, they are never heard of by other people.”

We recognize the phenomenon he has described even today, when industry coalitions such as the Chamber of Commerce advocate endlessly for supplies of cheap foreign labor, and the workmen have no power to stop the results of wage stagnation that have prevailed for decades.

Please, notice Smith’s use of the word “master” to refer to what we call an employer, and “servant” to refer to what we call an employee today.

Much is changed by language, including perception. The cold hard fact of the matter is that Smith’s use of the language is entirely correct, and perhaps we should start using it properly going forward by referring to employers as masters, employees as servants, and employment as servitude. It is no mistake that the 13th Amendment was very specific in outlawing involuntary servitude, because its authors recognized servitude in general to be pervasive.

But it is also clear from the context that Smith prefers men working for themselves and offering their services as independent workmen, that is, owners of their own businesses who own their own means of production, over servitude necessitated by needing to rely upon a Master’s ownership of those means.

Adam Smith had a great deal of common sense, as witnessed by this statement: “A man must always live by his work, and his wages must at least be sufficient to maintain him. They must even upon most occasions be somewhat more, otherwise it would be impossible for him to bring up a family, and the race of such workmen could not last beyond the first generation.”

This is, of course, exactly what we see going on today all across the Western world. The price of necessary things such as housing and medical costs have risen to such a degree relative to wages, and economic insecurity is so pervasive that we can’t afford to have enough children to replace ourselves. Adam Smith never foresaw greed so rapacious that a people would be simply replaced.

Adam Smith’s work is not premised upon the existence of supranational corporations that are effectively answerable to nobody, and whose profits must be elevated as the highest good. Rather, as stated in the title of his work, he advances the wealth of nations as that good. And what is a nation? It is a group of people of shared history, language and ancestry. Although class differences are understood to exist within the nation such that some will be more wealthy than others, the entire goal of what he set out is a rising tide that will lift ALL boats, the boat of the entire nation, without regard to class.

That is to say that under Smith’s system, wealth disparity, being inevitable anyway, is used to invest capital that increases the value of labor and thereby results in greater wealth for the laborer as well, and thus increases the wealth of the nation as a whole. Certainly, that is not what we are seeing today, because any increases in productivity brought about by the investment of capital are being more than offset through artificial increases in the supply of labor – and a very narrow class of people gets to pocket the difference. In this way the wealth of the nation is hollowed out, to the benefit of a few.

There is a great deal of useful information in Smith’s work. Much of it, I must say, is laid upon the premise of a broadly shared moral contract across all classes and certain checks and balances that would prevent abuse. But today that is not the case because otherwise we would not see boom and bust cycles in housing as a result of deregulation. Even so, Smith can give a very good background in matters such as stock, so that we can see how the concept has become perverted from the original intent of cooperative ownership in order to create a financialized economy that funnels all profits to a handful of financiers who produce nothing.

And here is where we pull back the veil of “economic efficiency.”

A reasonable and largely correct argument can be made for economic efficiency in the mold of Adam Smith’s vision. However, what is referred to as economic efficiency today bears no resemblance to this.

We do not live in Adam Smith’s time, which was a time of nation states. Instead, we live in a time where corporate entities have become supranational and effectively unaccountable. As a result, the nations are exploited rather than enriched.

If you take a moment to look around the United States, you will see exactly what I mean. Anytime you travel just slightly outside the major metro areas, you will find shuttered factories, ghost towns, places where the average car is 20 years old, decaying infrastructure, main streets that are uninhabited after dark and a pervasive hopelessness. You will find the parks, monuments and fountains that were built in a more optimistic era crumbling into dust, and the people of all races living near them subsisting on welfare and disability payments.

Most people don’t know what the Dow Jones Industrial Average is. It seems to be a number that bears no resemblance to reality, but broadly reports how well the stock market is doing. The Dow Jones is an average of the price per share of a handful of important stocks.

If you had invested $631 in such a stock in 1970, you would have cashed it out for $28,000 in 2019. But what does this mean in real terms?

In 1970, the median wage earner earned $6,186 – an income equivalent to 9.8 shares of a Dow Jones index. In 2019, the median personal income was $40,100 – an income equivalent to only 1.4 shares of a Dow Jones index. In other words, personal wealth from 1970 to 2019 fell 85% relative to corporate wealth. In 1970, half of the employed people in the country earned enough to afford 9.8 shares of the Dow Jones index. Today, fewer than 2% earn an equivalent amount.

You might say that I have chosen a very unconventional way to measure this, and you’d be right. So instead, let’s look at the traditional precondition for raising a family: the single family home with a yard so a kid can play outside in the sandbox.

The median home price in 1970 was $23,600. That is, the median home cost about 4 years’ median wages. In 2019, the median home price was $315,000. The median home costs about 8 years’ median wages. In other words, the cost of housing has doubled relative to income. But it’s worse than that. In 1970, 19% of people earned as much as the cost of a median home. Today, fewer than 3% earn that much. And, perhaps not oddly, that percentage of people, again, fell by about 85%.

So my measure is far from arbitrary. And, again, you can see the evidence with your own eyes anytime you travel very far from concentrations of income, you see infrastructure that we could once afford no longer being maintained, and sometimes outright abandoned. Shuttered factories, demolished hospitals, and dead towns don’t lie.

Fountains that once flowed and sparkled in the sunshine to the delight of children are now clogged with debris. Monuments which once stood as a proud testament of people worthy of emulation are now covered with moss in parks no longer mowed where the hopeless buy the poison that will end their despair. National parks which were once free for all, now have to charge ever-increasing fees. Roads which were once maintained are now filled with potholes. The water supplies of many cities are contaminated with lead, and they can’t afford to fix it.

This is the dirty little secret of “Economic Efficiency.” The government which is supposed to represent the interests of the nations it rules has instead done the bidding of very narrow special interests, and as a result the wealth of our people has been transferred bit by bit, funneled into a financial elite that funds the campaigns of those in power, in an unholy alliance that they don’t want us to notice.

As this year’s election charade continues, rather than wallowing in the muck of a made-for-TV movie, ask yourself if the government itself retains any actual moral legitimacy. Is this monster the thing our forefathers suffered, bled and died for? Or were they imagining something better?

Illustration of Adam Smith's grave in the public domain.

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