How Capitalism Enriches the Working Class

By Thomas DiLorenzo
Sep. 07, 2015

In the early days of capitalism there was a mass exodus from farm to factory. No one forced the masses to work in factories; they did so because factory work was better and more profitable than the alternative -- sixteen hours a day of backbreaking farm labor for less money. Or begging, prostitution, crime, and starvation. As Ludwig von Mises explained in Human Action (p. 615):

The factory owners did not have the power to compel anybody to take a factory job. They could only hire people who were ready to work for the wages offered to them. Low as these wages were, they were nonetheless much more than these paupers could earn in any other field open to them. It is a distortion of facts to say that the factories carried off the housewives from the nurseries and the kitchens and the children from their play. These women had nothing to cook with and to feed their children. These children were destitute and starving. Their only refuge was the factory. It saved them in the strict sense of the term, from death by starvation.

The same can be said of the conditions in some of the poorer countries today. Labor unions that complain about "sweatshops" and "child labor" are not concerned about the well-being of Third-World children. Quite the contrary -- they see them as competition for unionized labor and want them all thrown out of work and into the streets. Academics and clergy who assist labor unions in these crusades are viewed by the union bosses as useful idiots.

As capitalism developed, there was an inexorable increase in wages, thanks mostly to capital investment by entrepreneurs. Increased skill, education and experience on the part of the workers themselves (i.e., human capital development) makes them more valuable to employers by making them more productive and hence increases wages, but this is a slow and very incremental process. Capital investment, on the other hand, is capable of producing much larger leaps of productivity. Think of the productivity of a farm worker who plows a field behind a team of horses, compared to performing the same task on a tractor. He is no more skilled or hard working, yet he is infinitely more productive in terms of acres plowed per day.

When capital investment increases worker productivity, it means more profits for the capitalists who must them compete for the more skilled labor. They must pay them more or risk losing them to other employers -- and losing the revenue that they can help generate as well. Under capitalism there is a strong correlation between the growth in labor productivity and the growth in wages.

In addition to being responsible for higher wages, capitalism produces cheaper products, more products, and better quality products, thanks to the never-ending process of competition. The lowering of prices gives workers an even bigger pay boost with which they can purchase the increased array of products and services produced by capitalism, thereby enhancing their standard of living.

Nothing benefits "the masses" economically more than the growth of capitalism, for capitalists have always understood that the way to become really wealthy is to provide more value at lower prices to the largest possible customer base. Thus, products like cars and refrigerators that were at first the exclusive province of the wealthy soon became available to everyone.

Productivity growth spurred by capital investment is also responsible for shortening the work week. The only way workers can work less but get paid more is by being more productive, i.e., producing more revenue per hour or week for their employers. Human capital investment plays a role here, but so does capital investment and risk taking by entrepreneurs. Thanks largely to capital investment, the work week in America is about half of what it was at the advent of what economic historians call "the second industrial revolution" that began at the end of the American Civil War (1865). The shorter work week is the result of capitalism, not lobbying by labor unions or federal legislation that only codified what already existed.

Capitalism is also responsible for the demise of child labor. Young people originally worked in factories (and still do in many parts of the world) out of economic necessity, for the alternatives were crime, prostitution, begging, or starvation. As workers became more productive and better paid, thanks to capitalism, they were able to take their children out of the factories and send them to school. Legislation banning child labor only codified what capitalism had already been hard at work abolishing. Moreover, such legislation was usually inspired by labor unions who wanted to throw young people, who competed with union labor, out of work. This kind of "child labor" legislation was designed to harm children by depriving them and their families of economic opportunities that they so desperately needed (and need).

Capitalism has also made the workplace safer. In relatively "dangerous," strenuous, or dirty jobs, employers must pay a wage premium because relatively few people want such jobs. Economists call this a "compensating difference." The man who rides on the outside of the garbage truck at daybreak, in the winter, in the northern states, does so because he makes a very good salary -- better than any of his alternatives. Profit-seeking capitalists have always understood that they need to pay more to get people to perform risky or dangerous work. Therefore, they have also always understood that there is profit in making the work place safer. A safer workplace requires a lesser compensating difference. Lower wages paid to the workers can mean higher profits for the capitalist. Thus, the American workplace had become safer and safer for generations before the Occupational Safety and Health Administration (OSHA) was established in the 1970s. Indeed, OSHA has often reduced workplace safety with its clumsy and stupid workplace rules enforced by government bureaucrats with no knowledge of the specific work that they are regulating.

Labor unions, on the other hand, have never benefited anyone but the highly-paid union bosses and some of their members, who have never accounted for more than about one-third of the American labor force (less than ten percent today in the private sector). If unions are successful at raising wages above market rates with strikes, strike threats, shut downs, sabotage, or negative smear campaigns against corporate executives ("corporate campaigning"), the laws of economics dictate that some of their members will lose their jobs -- usually those with the least skill, experience, and seniority. Employers will not pay workers more than they can produce in revenue for them and still stay in business. Thus, a new hire who can produce say, $500/week in additional revenue, is not employable if the union "succeeds" in negotiating a $700/week wage. This is the "disemployment effect" of unionism.

In addition, labor unions in America have long been the main source of anti-capitalist propaganda, and of lobbying for anti-capitalist legislation (corporation income taxes, minimum wage laws, labor regulation, etc.). By weakening capitalism in this way, they weaken the main source of productivity growth and hence the main source of wage increases. The union bosses keep their high-paying jobs by benefiting at best a slim majority of their members, while harming the economic prospects of other union members and especially non-unionized workers, whom they demonize and slander by calling them "rats," "scabs," and much worse. Indeed, there is a very long history of violence perpetrated against competing, non-union labor by American labor unions, who are celebrated with their own holiday at the end of every summer.
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Thomas J. DiLorenzo is professor of economics at Loyola College in Maryland and the author of The Real Lincoln; Lincoln Unmasked: What You’re Not Supposed To Know about Dishonest Abe, How Capitalism Saved America, and Hamilton’s Curse: How Jefferson’s Archenemy Betrayed the American Revolution – And What It Means for America Today. His latest book is Organized Crime: The Unvarnished Truth About Government.