The ability to channel investment into areas of un- or under-employment offers the potential to expand the productive capacity of the economy to its maximum potential, that is to say, full employment.
Full employment has a number of advantages. A job is fundamental to life itself; without a job little else can be achieved. Without a foot on the ladder, there is no hope of mounting. Unemployment also puts demands on those who do have work, since they must pay taxes to finance welfare benefits. At the national level, unemployment represents a waste of productive potential. It is an immediate waste in that 5% unemployment is a 5% reduction in potential production. And it discourages labor-shedding productivity improvements, since those with jobs are afraid of losing them. Some economists have suggested that a degree of unemployment is essential, since a tight labor market can hold back economic development; on the contrary, employers and managers at a Japanese labor conference in 1991 were unanimous in that the shortage of labor at that time had forced them into increased labor-saving productivity and automation.
Despite the disadvantages of unemployment and the desirability of full productive use of all economic resources, the ability to expand an economy to full capacity cannot presently be realized, for as the economy expands to near-full employment, the danger of inflation causes the Central Bank to put the brakes on.
Inflation is an increase in price without a corresponding increase in value. If the price goes up for a better product that costs more to make, that is not inflation. But if a producer asks more tomorrow for the same product he sold for less yesterday, that is inflation.
Similarly with wages. More money for more or harder work is not inflation. Inflation is more money for doing exactly the same work.
The level of economic activity directly affects inflation.
When the economy is sluggish, producers and retailers find difficulty in moving their goods; they respond by introducing price reductions, incentives and special offers. As the economy expands and consumer demand expands, prices can be increased without damaging sales.
Similarly with wages. Employees are naturally reluctant to demand more money, or threaten strike action, in a time of high unemployment and with a lineup of job applicants outside the door. But when the economy approaches near-full employment and staff are hard to find, now's the time to demand that raise you've been wanting!
The price of goods and services on the market increases to match or exceed the value of credit available for their purchase. This is the dominant feature of a free market economy, and balancing the two highly desirable but conflicting goals of full employment and zero inflation or stable money is the key to national economic management today.
So Government and/or the Central Bank expands the economy by lowering interest rates. But when near-capacity is reached in the more prosperous regions, inflation begins to rise, and the Central Bank attempts to control inflation by slowing down the economy with increased interest rates, thereby maintaining a level of permanent unemployment. Full employment and full productive use of a free-market economy is an economic and financial impossibility. Thus getting a job becomes a game of musical chairs. For every hundred job-seekers, there are only at best ninety-five jobs. Similarly producers will be competing to sell their goods to a market which has insufficient credit to purchase them.
Apart from fiscal dishonesty and irresponsibility (printing money to gold-plate the presidential palace), inflation is not a monetary, but a social factor. In hard times people behave themselves. When things get easier producers put prices up, staff want pay increases. That is not an economic factor, just simple human nature.
The underlying economic factor which makes this situation possible is that pay and prices are settled by a form of disputation. The price is as much as the producer can get, or as little as the consumer is willing to pay. Similarly, the wage is as much as the employee can get, or as little as the employer can get away with.
This process is commonly known as free collective bargaining. But it is inherently unstable and subject to continuous upward pressure fuelled by the simple human desire for more. While the desire for more wealth and prosperity both personally and nationally is a very reasonable one, an economy and its participants should seek to increase their personal and collective prosperity by becoming more productive, not by demanding more money for the same work or the same product.
The process of establishing pay, profits and prices by disputation results in friction, industrial disputes, loss of productivity…. and permanent under-employment. It represents a facet of anarchy, in that it is a process of settling differences by unregulated dispute rather than by a system of debated and agreed guidelines and regulation.
Free Collective Bargaining on the wage, or pay side combined with its corollary of totally unregulated market pricing is the key factor which prevents expansion to full employment.
A potential solution to this problem already exists, and needs only to be applied on a national scale in order to bring a relative stability – and justice, that essential pre-condition of stability – to the economy.
For many years, a number of government agencies and corporations large and small, have been using a system of job evaluation to evaluate the work each employee contributes. Each job is analyzed, and its essential characteristics and demands, such as training, responsibility, working conditions and physical/mental effort involved, are measured on a series of common scales. The job "value" is then directly related to remuneration. In this way, pay is fair, both in relation to the work done, and in relation to the pay and the work of others.
Currently there are several such systems in use, well tried and working successfully. It would not be difficult to analyze and compare their different features in order to establish a single standard. This would become in effect a national standard of value for measuring the work element contained in a product or service, so that pay becomes a true reflection of the work required of a job. Society already measures apples and gasoline; it could hardly get along otherwise. Yet of all the things traded every day, work is the most important, and work is the one commodity we do not measure. A national standard would provide a point of reference, of justice indeed. Everyone would know how much they should get for the work they do, without hassle or argument or strike.
Labor evaluation can ensure remuneration stabilization. This process can be carried through to price stabilization.
A factory's, or a business's total costs consist of three elements. First, the cost of bought-in raw materials and components; second, the direct labor added in the factory; and third, the costs of capital write-off, overheads and finance.
These are the costs of making a product, of supplying a service. From these costs a Unit Production Cost can be calculated for each product or service supplied. If this Unit Production Cost then becomes the Selling Price, there would be a direct and fair relationship between cost and price, and therefore between pay and purchasing power.
But the Unit Production Cost is not normally equated with the Selling Price. The difference between the two is commonly referred to as the net profit. How is the net profit currently disposed of?
The prior destination for profits has traditionally been the investors, or shareholders. But today this is changing, reflecting in turn a new perception of the need to create a greater sense of teamwork.
Investment is vital, as also is the equipment it provides; but the machine is no longer the exclusive source of productivity and indeed its operation can be rendered useless without the intelligent participation of the workforce. The reality today, becoming ever more widely recognized, is that the people who work in an enterprise are equally vital: their inventiveness, their enterprise and initiative, their attention to the job in hand, their commitment to quality, their extra thought and effort... these are the factors which if encouraged and harnessed can turn investment into productivity and prosperity, and which can turn a company's fortunes. Thus an annual workforce bonus reflecting performance of the company may also be included.
Apart from investor dividends and employee bonuses, the other major destination for the disposal of company profit is re-investment, either in research and equipment or increased working capital. The advantage is that in-house or self-generated investment comes without future servicing cost or commitment to repay.
There is one more claimant to a share in the profits, and that is the customer. Profits have to come from somewhere – or someone. In fact it is the customer who pays the price and generates the profit; with this view a further claim on profits would come from the consumer, demanding lower prices.
The stabilization of prices would require the establishment of public policy for profit distribution. This could take the practical form, first, of an overall profit ceiling. Of the profit made, broad percentage bands could be established and gradually stabilized, distributing profit according to a pre-set formula as between co-workers at all levels, investors, and the internal needs of capital for reserves and re-investment.
As they do today, government revenue departments would continue to require that companies prepare in timely fashion properly audited annual accounts. Company profits would be examined in order to ensure that they are apportioned according to a consensus formula which respects the claims and contributions of consumers, investors, co-workers, and the future security of the business itself.
It should be noted that price stabilization effected in this way, through annual account regulation, would permit the same degree of latitude in pricing "deals" and special offers. But the profit ceiling would ensure an ultimate price stability.
Pay and price evaluation and stabilization would provide guidelines ensuring fair exchange between employer and employee, as well as between producer and consumer, without the need to argue or strike. More importantly, stable pay and prices would permit economic expansion to full employment without inflation.
Guidelines for remuneration/pay evaluation coupled with profit limitations would replace dispute with rules, and would move to stabilize pay and prices even in times of economic expansion. In such circumstances it would be possible to expand the economy steadily to full employment and hold it there indefinitely without fear of inflation.
Productive, expansionary development banking, bringing opportunity to every region and community, combined with pay, profit and price stabilization, would be achieved through a policy, not of unregulated free enterprise and free collective bargaining, nor State control of the economy, but through a policy lying between the two extremes, a policy of socially responsible free enterprise. The results would be seen in full employment, monetary stability, and a high level of productive efficiency and thus prosperity.
Social Security in its widest possible sense is the goal of every well-governed society, and the only true "Social Security" is full employment, that utopian condition in which there is a rewarding job for everyone who wants one.
Prosperity IS Productivity
Prosperity is created by production. We become prosperous, individually or collectively, by providing goods and services which people want and need, either for our own personal consumption, or for trade with others.
But production is only half the story. If we want to enhance and increase prosperity, production needs to be productive, it needs to be efficient. You can't increase your prosperity simply by working harder or longer. More hard work may increase your financial wealth, but at the expense of leisure, family time, and possibly also your health. To increase prosperity we need to work not harder but smarter, producing more and better goods tomorrow with less work than it took yesterday.
It is in the interests of everyone concerned in a business that it should be productive - and stay in business. And "everyone concerned" includes: owners, investors, and employees of course, but also suppliers and distributors, and the host community which is dependent on the company's wage-earners for secondary services. The problem is that these different interests may often see their own point of view to the exclusion of the whole. If business is to survive and prosper without the waste and distress caused by failures and bankruptcies, then a holistic view of business in its totality must be maintained.
The policy of Socially Responsible Free Enterprise begins with free enterprise. It identifies areas in which unregulated or insufficiently regulated economic activity can be detrimental to other participants, then acts to limit or eliminate such practices.
The consumer is the ultimate recipient of the product or service; indeed, since we produce solely in order to consume, the consumer must be the most important element in the process. Good design, economical production, efficient and stable administration; all these factors have a direct bearing on the product or service as it is presented to the consumer. And it is the consumer who suffers when a product fails to perform as it should, when its quality and service fall below the standard of which current technology is capable, or when it is over-priced as a result of wasteful production methods.
When products are poorly designed and inefficiently or wastefully manufactured, when services are careless and slipshod, when quality is poor, the consumer suffers.
But so also do the investors if the firm concerned fails to gain its potential market share. And employees suffer both from inefficient working conditions, and from the insecurity and potential job losses inevitably incurred in a poorly run company. The maintenance of high standards in any business is clearly in the interests of all its co-workers and investors, as well as the host community that depends on it for employment and prosperity.
In the wider context, businesses and industries are highly dependent on one another, for the supply of materials and components, for subcontracted work, for marketing and distribution. So the quality and reliability of one business affects, and is affected by that of several others.
This total integration and inter-dependence of co-workers at all levels and in all departments, together with investors, suppliers, distributors, host community and consumers, clearly reflects the reality that avoidable incompetence in any part of the chain affects others adversely if not disastrously.
Suppliers and distributors, as well as co-workers at all levels and in all departments should have the right to expect from one another the highest standards of professional conduct.
And consumers should have the right to expect that products and services reflect and embody the highest currently available techniques and capabilities in efficiency, quality and reliability.
A policy of Socially Responsible Free Enterprise recognizes this interdependence, and the obligation which it places on all "stakeholders" in economic activity to strive continuously for quality and productivity maximization for the benefit of the whole.
Maintaining the highest possible standards in management, quality and productivity will maximize job satisfaction and job security for suppliers and co-workers, while consumers will enjoy the use of products and services which reflect a continuous improvement in quality at progressively falling prices.
Many of the industrial world's more forward-thinking executives have spoken out in favor of the need for a "stakeholder charter". John Dasburg, CEO Northwest Airlines:
"My concern about the capitalist model is that while it seems to work and we're all involved in capitalism in an incredibly existential way, the fact of the matter is that there is, in my view, the need for some type of balance. Democracy didn't work without certain rights being guaranteed, what we call a Bill of Rights. And in my view there is somewhat of a bill of rights to capitalism. You just simply must take into consideration all of the various interests in society in the enterprise. And if you fail to do that, capitalism will fail. And we, as CEOs have a responsibility to see to it that we take into consideration all the stakeholders. And I just simply don't buy the view that maximizing shareholder value and disregarding other interests is a sensible way to run an organization. And certainly, in the long run, I think, it places in jeopardy the entire underlying economic system."
A rewarding job for everyone who wants one, with a fair day's pay, stable prices, and affordable housing in a pleasant environment, combined with true personal liberty and productive, responsive government disciplined by a clearly defined Principle and subject to its own laws – all of this can come together in one package through the accurate and consistent application of just one law.
The ideals which have here been expressed are in no way new. The Sermon on the Mount enjoins us to respect one another – "your neighbor as yourself". The Maximization of Liberty translates this ideal precisely into the area of politics and social conduct, by setting the goal for government of identifying and eliminating any injury or infringement of the liberty of one citizen by another, while not itself creating infringement by exceeding its purely defensive obligations.
Henry Bracton, whose observations written in the years following Magna Carta were to form the basis of English Common Law, stated that Rex debet esse sub Deo et Lege. The King, or in present terms the Government, must be under God and the Law. Under God – which is to say that king or government is required to act responsibly according to principles higher than those of self-interest, and under the Law meaning that king or government is subject to its own laws.
An economic policy of socially responsible free enterprise sets high standards of management and customer satisfaction, quality and productivity, performance and accounting for the private sector, standards to which government itself as a service to its tax-paying customers must also be subject. Governments today exempt themselves from commercial law. There can be no exceptions, not even for government. Indeed the process of auditing and applying the necessary disciplines to government should be applied and enforced with especial strictness and transparency, entrusted to a specially constituted Committee answerable to the Constitutional Executive. No institution, least of all government, can be trusted to discipline itself.
The aim of government should be the same as that of any well-run private sector industry or service: to provide the best possible service at the lowest possible price. The productive efficiency of non-legislative but "essential" services and programs needs to be maximized, either by contracting out under government supervision, and/or by imposing performance standards, cost limits, benchmarking checks, and any other of the many devices for improving productivity which may be applicable.
The OneLaw Principle, that we should confine ourselves to those actions and activities which are not detrimental or disadvantageous to others, which do not harm or injure others, is as old as human conscience. The parallel concept of government, that it exists primarily to prevent such actions, has likewise existed in political philosophy as expounded by reformers throughout recorded history. And the ideal that government, its function clearly defined and limited, should exercise its duties efficiently and at minimum cost to its customers, is a dream long cherished by reformers and tax-payers alike.
Accurate and consistent application of the OneLaw Principle would maximize liberty. With government clearly defined in its field of action and subject to the disciplines of its own laws, it would fulfil its functions productively and without incurring an over-burdensome tax on the earnings of its citizens.
This ideal was summarized by Thomas Jefferson in his first Inaugural Address given on March 4th, 1801:
"A wise and frugal government, which shall restrain men from injuring one another yet leave them otherwise free to regulate their own pursuits of industry and improvement, and which shall not take from the mouth of labor the bread it has earned: this is the sum of good government necessary to complete the circle of our felicities".
Today, over two hundred years later, most of our good citizens would probably, if asked, say that a wise and frugal government is an excellent idea... and one they are still waiting for.