Recently in the occupy wall street movement, I have been hearing the idea that labor is the most valuable resource in the economy and that capitalists accumulate their wealth by exploiting laborers. I am going to try and explain why this is false and has been proven wrong throughout history.
For years people thought that labor was more valuable than any other part of the economy. Karl Marx depicted capitalists as people who exploited laborers and often describe profits as “unearned income”. This thought is still prevalent today among Marxists and even non Marxists. Even Adam Smith, the founder of laizzes-faire economics, related labor to something special. The very first sentence in The Wealth of Nations was: “The annual labour of every nation is the fund which originally supplies it with all the necessaries and conveniences of life which it annually consumes, and which consist always either in the immediate produce of that labour, or in what is purchased with that produce from other nations.”
The idea that labor is what primarily determines the value of goods has somewhat been abandoned but some people still hold to this thought. Labor, capital, management, and natural resources are not the sources of value for goods. It is the value of the goods to the consumers that makes it possible to produce these goods given that the consumer is willing to pay enough to cover the costs of producing these goods. When costs are more than what the consumer is willing to pay, the business looses money because labor and everything else that goes into producing these goods doesn’t create value.
If labor was the source of success and prosperity then why is it that in many third world countries where people work for longer hours and under much harsher conditions have a lower standard of living compared to countries whose people work less hours under much better conditions such as air conditioning, breaks, etc. If capitalists accumulate their wealth by exploiting workers, then a country with the most amount of rich people should also have the most amount of poor people. But, the United States has more billionaires than any other country in the world, and even the laborers in the United States have some of the highest standards of living in the world. There have been times in history that the U.S. has had more billionaires than all other countries put together, and at the same time the laborers in the U.S. had the highest standards of living in the world. Even our poor people have some of the highest standards of living in the world. Most people living in poverty in the U.S. have running clean water, food, heating, electricity, a phone, television, and access to internet. We are one of the only countries in the world whose poor people are often overweight.
Often people speak of high wage countries like the U.S. unable to compete with low wage countries like China, as if the wage of labor was the only cost in producing goods. But, high wage countries have competed successfully with low wage countries for years. Henry Ford paid $5.00 a day which was the highest wages in the world at the time, and was still able to dominate the global automobile market because he produced the highest quality automobile for the cheapest price. For years India denied all automobile imports from the U.S.A, and it’s citizens were forced to pay much higher prices and wait on waiting lists for cars that were of poorer quality that were produced in India (who paid a fraction of the labor wages than the U.S.) compared to higher quality cars produced in a country that paid the highest wages in the world.
Many times, wealthy people are criticized for what they spend their money on and how much these items cost. For example, most people can’t believe a rich person would pay 100?s of thousands of dollars for a car. Wealthy people are often criticized for purchasing items that cost more than what most people make in a year. But in many instances these high priced transactions have made some industries survive that have increased the standard of living for everyone. For example, in the 1940?s television sets were only purchased by people who were truly wealthy. Had these rich people not spent massive amounts of money back then in order to purchase a television, the television industry might not have survived. These high priced purchases back then enabled television producers to survive and improve their production. The end result is that now most people even living under poverty levels in the U.S. own a television set and now almost anyone can afford one. Same thing with telephones, in the 1920?s telephones were a rare luxury that mainly the wealthy were able to purchase. But after the telephone industry was able to become more efficient in producing more telephones, almost everyone in the united states now owns a cellular telephone.
So in summary labor does not create value. Not to say labor isn’t valuable, but labor in producing an item does not determine how valuable that item will be. Having many wealthy capitalists in a country raises the standards of living of everyone in that country. Even when the richest 1% make purchases of items that only could be afforded by the wealthiest 1% often raises the standards of living for everyone.