Evil vs. Good Companies

Some people seem to think of everything in terms of good vs. evil when it comes to companies.

The reasoning goes something like this: some companies are evil and therefore mistreat employees, pay them too little, provide poor working conditions, etc. while other companies are run by morally upright owners and managers who genuinely care for their employees and treat them well. Our goal is to promote the idea of morally good managers, whether this means by protesting or by legislation.

Most Christians I talk to see this as the most effective way to improve the lot of the average worker – activism or possibly legislation. But usually the argument breaks down when specifics are introduced. In reality, the morality of the owners and managers has little, if anything, to do with working conditions.

Ultimately this goes back to the fallacy that owners have all the power: they arbitrarily decide salaries, benefits, hours, etc. and the employee is at his or her whim. The only hope the poor employee has to improve his or her situation is through unionism and government involvement.

Intuitively, Christians usually recognize the dangers of unionism and government involvement, but only in the extreme. Nearly none is willing to go so far as to advocate a truly free market. Ironically while they bash socialism, their underlying philosophy is, in fact, based on it. At the same time they barely understand free market theories, much less advocate them.

Because of this, I’ll often hear some sort of middle of the road compromise on any particular economic issue. Something like “I know that productivity is a factor in people’s salary, but I still think there should be basic laws about minimum wage, working conditions, vacation, pension, etc.”

How to Respond:

Number one: It’s very difficult to pull people away from their desire to be an authority. People tend to address problems directly, instead of setting up frameworks under which others can find their own solutions. They see the solution of leaving it to the free market as total chaos, producing uncertain results, which will potentially result in great suffering.

Number two: If the person is open to ideas, which is rare, explain that the laws of economics are in many ways the same as physical laws because people are similar in many ways and respond to stimuli and incentives. In other words, the market will set an equilibrium due to the forces of supply and demand, and personal incentives and motivation. Tampering with this can create a situation which appears better, but will inevitably have unintended consequences, which in every case yet analysed is deleterious overall.

Why the Appeal for Moral Managers is the Wrong Approach

Although tempting because of the way the human mind works, appealing to have more morally upright managers is ultimately useless. Logic and examples prove this point.

Let’s start with some examples:

1.       L.A. Clippers Basketball team owner Donald Sterling was an apparently very racist billionaire. Yet despite his racism, he paid black basketball players millions of dollars to throw around a ball. Even the most loving person on Earth wouldn’t have done more than this. The fact is Sterling had no control over how much he paid his players. Had he decided to act out his racism and pay them $5 per hour, he clearly would not have a team at all. His moral character was in fact unknown until it was exposed, meaning there was no way to derive his morality from what he paid.

2.       McDonalds pays very low wages, with a large percentage of workers making minimum wage. On the other hand, Exxon-Mobil pays really high salaries, many making 5, 10 or 20 times the minimum wage. It is also well beyond the minimum requirements for survival or even a decent life. Does anyone believe this is because McDonalds is run by immoral people while Exxon is run by exemplary and moral citizens?

3.       Even within particular organizations, salaries vary widely. To believe managers are just arbitrarily deciding who gets more and who gets less is rather silly. People obviously know salaries vary for other reasons.

What these examples prove is that a company does not arbitrarily decide wages. If this were so, every company everywhere would pay the minimum possible wage. So what determines wages? The main thing is:

Productivity

Productivity is the value an employee brings to a company. As a simple example, an employee who produces 5 shirts per hour that sell for $2 each, is producing an overall value of $10 per hour. Expenses have to be factored in. But in theory, the absolute maximum this employee could ever be paid is $10 per hour. Any more than this, the company would lose money for every hour this person worked. Demanding the employer be more moral will do nothing to raise this worker’s wage. According to recent studies, about 85% of wages are due to productivity or the value an employee brings to a company, and 15% comes from negotiation. This differs greatly from the traditional view that 90% of wages are just the whim of the employer, and the other 10% comes from the employee’s negotiation skills.

Productivity is determined by a number of factors. One is capital investment. An employee with heavy machinery can be much more productive than one with just a shovel. If a business environment is stable, with good laws, companies will want to do business there and are willing to invest. If it’s an area where equipment and other capital can be randomly confiscated, companies are not willing to invest much. Another factor in determining productivity is employee education and skills. In a low-skill, low-education area, employees are not as productive. They cannot operate equipment or perform complex operations. There is a greater supply of such workers, so they do not have a strong competitive advantage.

There are other factors as well.

Something else to keep in mind is that demand for labour is unlimited. Anybody would love to have several servants to clean their house, make the bed, walk the dog, etc. but usually people just can’t afford it. In order to gain a worker, we must pay more than they can get elsewhere. The reason I mention this is because of the false perception that in some areas, in some industries, companies are free to pay workers any amount whatsoever. This is never the case. Workers always have other options. So when spoiled American and Canadian brats protest a “sweatshop” in Asia and successfully shut it down, it’s not as though the former workers now have well-paid jobs. Instead they are forced to accept their next-best option which in many cases might be difficult physical labour in the sun for 12 hours per day, 6 days per week. If protests shut this new outdoor job down as well, the workers would seek other opportunities. Reducing opportunities is not the answer, but this is the ultimate result of minimum wages, working condition legislation, and any other law that increases the cost of labour above the equilibrium point.

In order to accept the theory I have laid out, we need accept only one thing: people pursue what they believe is their best option. Sure, maybe we can find examples of people who hurt themselves for absolutely no reason and do what they feel is worst for themselves without justification, but they are rare to say the least.

The bottom line is that employers do not determine wages. Wages are determined by market forces. Organizations can interfere in the free workings of the market, but only for an overall worse outcome. There is no free lunch and people must be suspicious when someone comes along claiming a government decree with fix a problem without consequence.