2017-03-11

The Fairy Tale of Capitalism: The Buyer of Labor and the Nine Percent


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FTC, the Fairy Tale of Capitalism is not one story, but a saga reflected in many stories. 





In a trade, at least two people participate, since the robots haven’t taken over yet in our glorious era. A trade could be a bucket of fish given in exchange for the pulling of a tooth by a dentist. If both parties have a wide range of counterparties from whom to choose, and if they both participate freely, without coercion or deception, then we call it a fair trade. 

In a fair trade, both parties benefit. The dentist doesn’t have any fish, and she is hungry. The dentist has plenty of tools and experience for pulling teeth, which she can do easily, and a costly certificate hanging on the wall for which she has no use if she doesn’t pull a few teeth now and then. The fisher has a sore tooth and more fish than he can eat. When the fisher hands over the bucket of fish and the dentist removes the tooth, they have completed the trade. After the trade, the hungry dentist has fish to eat after giving up nothing but 15 minutes of her time. The fisher, who may have been out in a boat hunting fish for the last three days, has a much relieved jaw after giving up a few fish he couldn’t use. Both parties give up something they value relatively less and get something they value relatively more. Both parties benefit.

Clayton Christensen, a Professor, sings of one of the traders, in our case the fisher, as a person with a “job to be done”, a goal to achieve or an obstacle to remove. The song is the “Theory of Jobs to Be Done”. The successful search for a product or person contributes to job creation, not to be confused with the Ingenious Innovative Job Creators, but that’s another story. 

In our advanced era, a trade more often involves money offered in exchange for a good or a service. In these money trades, we call the the two participants the Buyer and the Seller. The Buyer gives money to the Seller, and the Seller gives something to the Buyer. For the fisher and the dentist, the fisher first takes the fish he caught to the fish market, and gives the fish to the Buyer of fish who offers him the highest price. Now the fisher has money and an aching tooth, and he would be glad to give up some of the money to get relief from the pain. The fisher finds the dentist, and feels confident, having seen the certificate on the wall. The dentist removes the tooth in a quick procedure. The fisher hands over some money to the dentist. The hungry dentist is glad to have some money, with which she can buy food, the certificate on the wall having less value as food. With the money, the dentist goes down to the fish market at the wharf and buys a fish sandwich.

In the USA, the Ninety Percent probably includes the fisher. The Ninety Percent are the least wealthy ninety percent of households. They get almost all their income from selling their Labor. They receive about half the national income. 

We will probably find the dentist among the Nine Percent. In 2015, the income of a household in the Nine Percent was between about $125,000 and about $450,000

The Nine Percent, together with the Aristocracy (incomes above $450,000 per household), are the Ten Percent. The Nine Percent get about 30% of national aggregate household incomes. The Aristocracy gets about 20%.

The Ten Percent get about three-quarters of the income growth in the US economy. The Nine Percent get about one-quarter of the total incomes growth. The Aristocracy gets the rest.

Most of the income of the Nine Percent comes from their Labor, but they get about 7% to 10% of their income from ownership of capital (stocks, bonds, etc.) and businesses. The Nine Percent have about 30% of national aggregate capital and business income. 

In the fair trade, a Seller has many potential Buyers. The Seller can accept a trade with the Buyer who offers the highest price or terms most favorable to the Seller. A Buyer has many potential Sellers and can agree to a trade with the Seller who offers the lowest price or terms most favorable to the Buyer.

In our golden era, Sellers of Labor (workers) often contend with many other Sellers for a trade with a small number of Buyers (employers). In some industries and locations, the employers have market dominance. One could count the potential employers for specialized Labor on one hand and have fingers left over. Employers have what we call Monopsony. On the other hand, the employers have many applicants for each job vacancy. The lack of a large number of employers impairs the fairness of trades available in the market for Labor.  The Ninety Percent generally work for companies owned by the Ten Percent.

Some of the Professors once sang that a Free Market is a fair market, naturally correcting itself for imbalances of Buyers and Sellers that may arise from time to time. But that is another story.





I’m grateful to my friends who reviewed a prepublication draft and offered helpful comments.



Sources


Daniel Brockman, “The Fairy Tale of Capitalism: The 90 Percent” (Nov 30, 2016)  https://daniel-brockman.blogspot.com/2016/11/the-fairy-tale-of-capitalism-90-percent.html

Congressional Budget Office, “The Distribution of Household Income and Federal Taxes 2013 (June 2016, Congress of the United States) https://www.cbo.gov/sites/default/files/114th-congress-2015-2016/reports/51361-HouseholdIncomeFedTaxes.pdf

Dina Gerdeman, “Clayton Christensen: The Theory of Jobs To Be Done” (Oct 3, 2016, Working Knowledge: Business Research for Business Leaders, Harvard Business School) http://hbswk.hbs.edu/item/clay-christensen-the-theory-of-jobs-to-be-done

Kevin J. Lansing and Agnieszka Markiewicz, “Consequences of Rising Income Inequality”, FRBSF Economic Letter (Oct 17, 2016, Federal Reserve Bank of San Francisco) http://www.frbsf.org/economic-research/publications/economic-letter/2016/october/welfare-consequences-of-income-inequality/ 

Thomas Piketty, “Capital in the Twenty-First Century” (2014, English translation) http://amzn.to/2fJg7Oi

Emmanuel Saez, “Striking it Richer” (June 30, 2016) http://eml.berkeley.edu/~saez/saez-UStopincomes-2015.pdf 



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