Labor
Labor and Leisure
Human time is the ultimate and most scarce resource, as spending it is irreversible, and its quantity cannot be increased indefinitely. Time’s scarcity and unpredictability creates in humans a positive time preference: a preference for a present good over an identical future good. This preference applies to time itself, humans value their present time period more than they value identical future time periods. The extent of this preference varies considerably for each person across time, and it varies across individuals, but it is nonetheless always present, and always positive, as will be discussed in more detail in Chapter XX.
Humans can spend their time in two ways, categorically. The first way involves us doing the things we desire, like, and want to do for their own sake. The activities here are ones that are subjectively valuable to individuals who engage in them; they provide utility in their own right. This time is, in a sense, its own reward. Economists refer to this time as leisure, and it includes rest, time spent with loved ones, entertainment, recreation, and anything an individual enjoys. Leisure is what you would do if you didn’t have the need or desire to work. The second way of spending time is to spend it doing things for their results and outputs. This is time man spends doing an activity that he does not find valuable in and of itself. Economists refer to this time as labor, which Mises defines as “the employment of the physiological functions and manifestations of human life as a means”.
The distinction between leisure and labor is the distinction between what you want to do and what you have to do. Or, put differently, it’s the distinction between what you do for its own sake, and what you do for the sake of its outcomes. If a person were engaged in an activity because they enjoy it, regardless of its outcome, it would not be labor, it would be leisure. Labor itself has negative utility, or disutility, by definition; it reduces a human’s satisfaction to engage in work, but man engages in it nonetheless because he expects it to produce outputs that offer him larger future utility. The present utility of leisure is sacrificed in favor of the expected future utility from the outcomes of the labor. The opportunity cost of labor is the leisure forgone.
Yet labor is not something that is uniquely human. Instinctively, animals have the ability to engage in activities for which the rewards are not immediate, trading off present utility for future utility. Birds build nests, beavers build dams, and predators spend significant time chasing their prey. Unlike animals’ instincts, human reason can devise many other methods for economizing, discussed in the next XX chapters.
Humans have an infinitely high time preference when they are born, being unable to conceptualize of labor, or anything but their immediate basic desires, and needing adult provision and supervision to survive. As humans grow and mature cognitively, they realize they care about more than just increasing the value of their present time. As soon as a child is capable of conceiving of the future and valuing it, they begin deferring instant gratification in exchange for future reward. The valuing of the future is what begins the process of lowering our time preference with age. With the ability to conceive of the future comes the ability to reason about it, plan for it, and work for it.
Toilet training, or any activity carried out in anticipation of reward from parents, might be the first things that teaches a child how to trade current disutility for future reward. The child begins to transcends the narrow concerns of immediate gratification, and begins economizing for the future, in two forms: Economizing to lengthen the time period in which he is alive; and economizing to provide for future time periods. The human struggle to survive and thrive is the struggle to increase the amount and value of time we have on earth, and it is inextricable from the need for work in the present, and for sacrificing the pleasures of the present.
Survival and prosperity in the long run require work and sacrificing pleasure today, and that incentivizes the lowering of time preference. When man values the return of labor higher than the disutility of sacrificing leisure, man will work.
Man’s reason drives him to realize he can expend labor in the present to provide himself future utility and improve his future subjective well-being and extend his life. No matter how favorable or unfortunate his circumstances, human reason will always think of ways of improving their situation. In a tropical paradise, parched desert, farmland, or a modern industrial society, reason will always find a way in which it can direct man’s physiological functions and time toward improving his condition. There will always be present utility to sacrifice on the altar of future utility. No matter the human condition, human reason will always think of ways of making it better.
The castaway on an idyllic tropical paradise might appear to moderns to be living the ideal lift, but it will nonetheless inevitably involve labor. Whereas man can be happy on the beach, time passes and his contentment declines, and other needs arise. Time on the beach, like leisure in general, and like all goods with positive utility, exhibit diminishing marginal returns. The joy of the beach declines the more time the individual spends there. Other desires only intensify as they go on unsatisfied for longer periods. He will soon get hungry, and his reason will lead to him conclude he can satisfy his hunger by working to secure food. His reason leads him to devise ways in which he could transform wild animals into nutrition. He tries to catch a fish with his bare hands, or he hunts down rabbits and deer. There is no guarantee the toil will pay off with a worthwhile reward, but hunger just gets more pressing as time goes by, increasing the urgency of the hunt, and decreasing the value of the leisure that would be attained without labor, thus incentivizing more, and better, smarter toil. The motivation for work, ultimately, is that failure to do it, or failure to carry it out successfully, will result in death, sooner or later.
Outside of the garden of Eden, man always has to work to survive and thrive. At any point in time, each individual faces the choice between labor and leisure, as well as the choice of what kind of labor to perform to increase productivity. Labor is our first conceptual tool for increasing the amount and value of our time. All animals perform labor as part of their instinctive composition, but unlike animals, our reason allows us to develop other tools, which can increase the productivity of our labor.
Productivity of labor
Man can work to produce products for himself, or he can can work to produce products for others, receiving compensation in return for his time. Wage labor is distinct from performing a service for someone as a favor or gift, because the former involves compensation. Wage labor is distinct from slave labor in that it is voluntary; the laborer can stop working at any point in time, and the employer can only seek to keep him by trying to convince him, willingly, to return, through better payment, work conditions, or similar non-coercive means. Labor is, by its definition, a consensual agreement between the employee and the employer.
For the employer and employee to willingly agree on an arrangement to exchange labor for compensation, the conditions of the exchange must be satisfactory for both. This means that the compensation of the laborer is higher than the valuation he places on the alternative use of his time, which is leisure. The value of the employee’s labor to the employer must also be larger than the wage the employer pays, or else she would not pay it. At the margin, when an employer is deciding on whether to hire an extra worker or not, she will only do so if the extra worker provides a marginal increase in revenue for the employer that is higher than the wage. Each extra worker must contribute to an increase in output production at the margin. The marginal increase in quantity produced is referred to as the marginal product of the worker. When that number is multiplied by the price of the product, we obtain the Marginal Revenue Product: a measure of the revenue added to the employer by the marginal worker. Should there be a wage that is higher than the laborer’s valuation of leisure, and lower than the employer’s marginal revenue product, then the two can agree to work together to the benefit of both. Otherwise, there will be no wage employment between the two.
The decision of an employer to hire an employee is a market transaction like all others. The difference between it and the exchange of a consumer good is merely in the fact that the employer does not value the labor based on their own subjective preferences, because labor is not a consumer good for the employer. Instead, since it is a producer good, the employer values the labor based on how much output it can produce, multiplied by the subjective valuation the market gives to the product.
Labor occupies a unique position in our world due to what Mises calls its “nonspecific character”. Unlike specialized capital equipment, human time has the versatility to be directed to all kinds of different production processes. Capital which can no longer be productive in a specific line of business is likely to be rendered obsolete, but human time can always be repurposed into more productive uses. There is always more demand for more human minds and hands to work in the world, due to human time’s ultimate scarcity, and employers will always be willing to take the next worker at a wage lower than their marginal productivity.
Productivity is understood as the quantity of output produced by one unit of input in a specific period of time.
As discussed in the previous chapter, the value of human time has appreciated significantly over human history. Wages continue to rise, because worker productivity continues to rise, forcing employers to pay higher wages to obtain the labor they need and prevent it from going to competitors. Looking at historical data for wage rates makes this abundantly clear.
[DATA ON WAGES HISTORICALLY]
[Simon index wages in real terms of goods and services. Plus long term data from OurWorldInData.]
Steadily and consistently, the value of human time has risen over the past, as humans have accumulated more capital, invented higher productivity technologies, utilized more powerful energy sources, and extended the division of labor to larger markets and more participants, particularly in the past 200 years, with the industrial revolution, as will be discussed in the forthcoming chapters. All these inventions, tools, and technologies that increase human productivity have led to the rise in the value of human leisure, because now we need to be paid significantly more to part with it. This is the end goal of economizing, after all, allowing humans more, and better, time on earth.
Wages and unemployment
The question of minimum wage laws and unemployment is another good way to illustrate the distinction between the praxeological method of analysis, in which economic phenomena are understood through the lens of the human actions determining them, as opposed to the modern macroeconomic collectivist approach, which focuses on analyzing aggregates, which is very popular among the government-financed fake collectivist economists infesting modern universities with their sophistry.
Imagine a city with no minimum wage laws, and a politician looking to win an election. The politician proposes the introduction of a minimum wage equal to 100 satoshis per hour. Having analyzed the labor market, the local university’s collectivist fiat economist finds that 20% of all city workers currently earn less than 100 satoshis per hour. He further finds that imposing the minimum wage would lead to a rise in wages in the city equal to 1 billion satoshis per year. Based on whatever flavor of Keynesian models happens to be popular among the influential government-funded economic journals around that time, the economist further estimates that the 1 billion satoshis increase in payrolls would translate to an/ 800,000,000 satoshis increase in spending, which would lead to the creation of 2,000 new jobs, a 12% increase in industrial output, an 8% increase in services, and a 2 billion satoshi rise in Gross Domestic Product. Using the framework of collective economic analysis, the minimum wage law sounds like a great boon to society. The poorest workers will increase their living standards significantly, some unemployed workers will find work as a result of the extra spending, and all of society becomes more productive. If this sounds too good to be true, that is because it is not true.
This approach to economics was essentially imported from mathematics and physics, primarily by economists who couldn’t cut it as graduate students in physics and math departments. According to this collectivist approach to economic analysis by aggregates, the causal agents in economic phenomena are the theoretical relationships governing these aggregate measures, as established by economists, in a way similar to how physicists and chemists establish scientific rules. The limitations of this approach are discussed in more detail in chapter XX.
Things look very different through the lens of the sound economist’s Mises-tinted glasses. Knowing that human action is the real driver of human affairs, the sound economist does not analyze the world through aggregate numbers, but instead, he analyzes the decisions of the real humans who are affected by this new law. Employment is an agreement between two individuals, the employer and the worker. The sound economist understands that a business owner’s choice to hire someone is based on a simple calculus: they will hire them if their contribution to the firm’s revenue exceeds their wage. If their wage exceeds the marginal revenue they bring, then hiring them costs the business money, and is akin to a donation from the business to the worker. Employers know that making such a hire is a costly mistake, and employers who do not know that will soon witness their business fail as it continues to hemorrhage money on wages it cannot afford. Wages, like all prices, are not just arbitrary numbers chosen by greedy employers, they are a reflection of the marginal productivity of the worker. As the law now stipulates that a worker must be paid 100 satoshis, the employer now has to reconsider whether it is worth it for him to hire this worker. When government mandates a minimum wage, it does not magically alter the calculus of the employer, nor does it magically increase the productivity of the worker. The employer will still only hire workers whose productivity is higher than their wage. Thus, the minimum wage law makes it illegal for employers to hire anyone whose marginal productivity is less than 100 satoshis per hour. Any worker whose productivity is less than 100 satoshis will now become a drain on any business that hires him and pays him that amount. Either they get fired, or the businesses that hire them lose money and go out of business.
Viewed through the lens of human action, the effect of a minimum wage law is to make it illegal for workers with a low productivity to get jobs, and many of these workers will lose their job. Continuing to look through the lens of human action, one would find that the workers who lose their jobs are the workers with the lowest productivity in society, and these are usually young people. Making it illegal for them to work is effectively making it illegal for them to train on the job and acquire the valuable on-site work experience that would raise their productivity. Another possible implication is that some businesses, particularly the ones that depend on these low-wage laborers for their operation, would pay the higher wages but also raise the prices of their goods to finance the higher wages. Consumers would then pay the price through higher prices and lower quantities of good available.
?Switzerland unemployment was nonexistent before they went off gold in the 1970s.
Under a free market, individuals have the freedom to work or not at any wages they want. In such a world, remaining jobless is a conscious choice to refuse to work at the going market rate offered to a worker. It is therefore a voluntary form of unemployment. Involuntary unemployment, on the other hand, can only result when there are laws, rules, or restrictions that make it illegal, and subject to punishment, to engage in labor at specific wage rates.
Supply of Labor/Will we ever stop working?
Do we work less when we are rich?
Labor, as a resource, is very precious precisely because it competes with leisure for the scarcest of resources, human time. Further, as income and utility produced from labor increase, they lead to an increase in a person’s wealth, which results in them being able to afford to spend more time enjoying leisure, making the disutility of labor even higher, discouraging them from working. Labor might be the only economic good or activity whose quantity supplied can decline as its price rise, because the increase in the price of labor causes a rise in worker wealth which might allow the worker to purchase more leisure and sell less labor. The scarcity of time means that the supply of labor has an opportunity cost that becomes more valuable the more a person earns from working. This dynamic has led many non-economists to speculate that economic progress might one day mean humans will no longer need to work.
Will we ever get to a point where we don’t need to work? This is a common fantasy among many politicians and economists who have no conception of the economic way of thinking, such as John Maynard Keynes and his many followers. Writing in the 1930’s, Keynes speculated that productivity will continue to increase so much that by 2030, human would only need to work a 15 hour workweek to produce what they need. Keynes imagined technological progress would bring about technological unemployment, which he defined as “unemployment due to our discovery of means of economising the use of labour outrunning the pace at which we can find new uses for labor.”
“All this means in the long run that mankind is solving its economic problem,” Keynes concluded. With the almost-endearing naivety of a child, Keynes imagines the economic problem pertains to securing some specific set of goods and services needed for a happy life, and once these are secured, the economic problem is solved once and for all, it disappears, and there is no longer a need for anyone to economize. Keynes thinks the economic problem is like a mathematical problem, only needing to be solved once. Keynes does not understand that the economic problem is a permanent part of the human condition, as we are constantly facing choices to make about scarce objects, because that scarcity comes from our time.
Keynes seems unaware that what he posits as a replacement of the economic problem is just the economic problem itself, but applied to choices slightly different from the ones he’s used to seeing in the very few economic books he has ever read: “I draw the conclusion that, assuming no important wars and no important increase in population, the economic problem may be solved, or be at least within sight of solution, within a hundred years … Thus for the first time since his creation man will be faced with his real, his permanent problem-how to use his freedom from pressing economic cares, how to occupy the leisure, which science and compound interest will have won for him, to live wisely and agreeably and well. ” Keynes fails to see how the new problem is no different from the old problem. Deciding how to occupy his time is man’s eternal and universal economic problem, because time is scarce. Keynes’ understanding of economics is so simplistic he thinks it’s purely about being able to secure the basics of human existence, so much so that even when discussing human choice over time, he fails to recognize that that is an economic choice.
No matter how many material objects we have, we will always have a choice to make at the margin between immediate satisfaction and future satisfaction. We can always forsake present satisfaction for more future satisfaction. There will never be complete satisfaction and utopia, because human reason will always foresee a better possibility and work toward it.
Keynes bases his fantastic vision of the future on the completely unjustified assertion that there are two types of needs: absolute and relative needs. Absolute needs, Keynes asserted, are needs felt “whatever situation of our fellow human beings may be”, while relative needs are felt “only if their satisfaction lifts us above, makes us feel superior to, our fellows.” Keynes posits that demand for the latter needs may be insatiable, but demand for the first class of needs, which could become completely satisfied. Keynes though the economic problem has always been the primary and most pressing problem of the human race, and the entire biological kingdom, and solving it would be a momentously important transformation of the nature of human life.
Keynes thinks the economic problem is something that can get solved like a mathematical problem. He does not understand that the economic problem always exists for as long as human time is scarce, and humans have choices to make. Even if humans were in an imaginary heaven where everything a person wishes for materializes in front of them immediately, the economic problem would not be solved, as humans’ mortality still forces them to economize their scarce time. The economic problem is solved every instant in which a human reasons about their time and makes a choice, only for a new economic problem to emerge the next instant, and force a human to make a choice.
As such, it is completely nonsensical to imagine, as Keynes does, that work could ever end, or the need for work could ever go away, or that abundance will reach a point where labor will not be needed. We are always economizing, and always have to make choices between alternatives. As our living standards improve, the choices improve, but the act of choosing must remain, at least for as long as humans are mortal.
It would be very cheap for someone to live today by the standards of living of the days of Keynes. Yet, even the poorest people today can use and own many things which Keynes never was able to own. As long as humans economize, their reason produces new goods, services, and objects which others desire.
Also, humans always want more.
Is Labor exploitation?
Are laborers exploited in capitalism? Millions of pages of drivel have been written on the topic of worker exploitation by capitalists, based largely on the incoherent ramblings of Karl Marx, a semi-literate German parasite who virtually never worked a day in his life and lived off the support of rich benefactors in England as he insanely pontificated about reengineering the world into a managed dystopian hell, becoming forever the archetype hero for generations of lefty parasties who cannot muster the discipline and intelligence to work a productive job but nonetheless believe they possess the wisdom to remake the lives of billions.
Marxist economic analysis is based on the labor theory of value, discussed in chapter 2. Since all economic goods require some labor input in order to make them economic goods that can serve our needs, the Marxist falsely concludes that labor is what gives economic goods value, and the quantity of labor that goes into the production of a good is what determines its value: goods are valuable to the extent to which labor has gone to producing them. With the baseless assumption that economic value is imparted onto objects purely as a function of the amount of labor that goes into them, the Marxist has automatically eliminated the value of the contribution of the capitalist, who defers consumption of the capital to provide it to the worker to increase their productivity. To the extent that the worker does not receive the entire profit in the process of production, the capitalist is exploiting the worker. Workers need to turn up and work, but capitalists do nothing, so they are exploiting the workers.
This is obviously nonsensical because workers choose, willingly, to work for the capitalists. As long as the capitalist is not using violence and the threat of violence to force the workers to work for them, then they are not exploiting the worker, because the worker is clearly choosing to work that job, which indicates it is the best option available for the worker. An observer or economist might resent this reality, but they cannot blame the capitalist for providing the worker with the best option they have in their life.
But the view of work as exploitation is also nonsensical because it betrays a deep ignorance of what capital is, and its value to economic production. Capitalists defer consumption to provide capital for workers, which increases the productivity of the workers. At any point in time, the capitalist is choosing to forgo consumption in order to provide the worker with capital to increase their productivity. At any point in time, a capitalist can liquidate their capital goods and use the proceeds to finance consumption. By choosing to forgo consumption and provide the capital to a worker, the capitalist is allowing the worker to have a higher productivity level. It is this higher productivity which makes the worker happy to only receive a part of the proceeds. The alternative to capitalist exploitation is not that the worker receives all of the revenues from sale; it is that the worker receives a much lower revenue from having a much lower productivity without capital. A Marxist might look at a cab driver as being exploited by the cab owner, but that is only because the Marxist cannot conceive of what would happen should the driver deny the capitalist compensation for giving them their car. The capitalist would be happy to use the car as a consumer good, or to sell it and consume its proceeds. The driver would have to carry people on his own back, which would be a highly uneconomical, and physically destructive job. Only by allowing a capitalist to “exploit” him by providing him with capital can the job of a driver be productive and safe enough to give the worker a good life.
The production process requires the worker to dedicate their time, but it requires the capitalist to contribute capital, which can only be acquired through previous work, and can only be retained through continuous deferral of consumption throughout the entire production process. Without compensating the capitalist for their decision to delay gratification and invest, there will not be any capital, and the worker’s productivity would decline significantly. The capitalist does not exploit the worker by taking a part of his output forcibly; the worker willingly pays a part of his output to the capitalist in exchange for securing a much higher productivity level.
The labor-capitalist relationship is a feature of human relations that has existed in all human cultures, and it reflects a natural trade between an individual who has the ability to work but not the means to secure the necessary capital, and another individual who has more capital than he can, or wants, to operate himself. The continued existence of this relationship is what incentivizes humans to accumulate their capital, while pathologizing it and punishing it has led to societies experiencing calamitous economic destruction.