A fundamental principle of the Socialist doctrine is that of class antagonism. The bourgeois, or the “rich”, its proponents contend, are necessarily in conflict with the working proletariats as the former seeks to enrich themselves as much as possible at the expense of the latter receiving lower wages than he considers appropriate for his work. Though this argument sounds logical at first as an appeal to incentive structures, it misses a crucial component: competition. In an economy with relatively many competing companies, a worker dissatisfied with his wages or other working conditions at the company he’s working for may transfer to a different one more in line with his ideal.
This is especially the case if he works arduously by building up his skill set and excels at his work. The employer may then become inclined to increase wages and/or improve working conditions, either because of a feeling of moral obligation to pay the worker closer to the value he contributes to the business or just that he would lose a valuable worker if he left for another with more appropriate worker compensation. The competitive nature of the market thus counteracts the intuitive – but at best misleading – notion of class antagonism inevitably breaking out through worker exploitation from the inherent incentive structure of employment.
I will still, however, argue that there actually is a legitimate class antagonism operating in the current economy, though with very different causal mechanisms from what Socialists frequently assume underlie it. It’s not the market, but the State, which spurs class antagonism in the economy, and it does so in numerous ways. The most obvious ones would be found by looking at the contrasting interests between the State and the population residing in the territory it dominates, but I’ve already written much on that (here, here, here, and here), so for this article I will rather focus on how State interference in the market theoretically can, and in many cases in practice actually does, increase the tension between the “poor” and the “rich” in the private sector.
#1: Taxes on Workers’ Income, Purchases, Property, etc.
The income tax is a major means of financing State programs. This has a negative effect on the relationship between the employer and the employee, as the latter earn lower wages than he otherwise would, while the former earns nothing for this measure. In fact, as supply/demand analysis shows us, he actually loses money as he has to pay more in total. Despite this being the consequence of the tax, the employee may still feel like he is being exploited for being paid less than the value he is contributing to the business, causing increasing distrust in the relationship. The income tax also makes it more difficult for the employer to hire new employees, creating unnecessary unemployment and poverty and thus expanding the gap between the “poor” and the “rich”.
Of the money that the worker has left after the State has seized a notable portion of his wages, he also has to use more than necessary when using it to purchase goods and services. This further expands the gap between the “poor” and the “rich” by making it more difficult for the poor to acquire basic needs and may fuel contempt by the former of the latter as they wouldn’t necessarily know that the prices were high because of such taxes and not that the retailers want to enrich themselves at their expense or that the employer just doesn’t increase the pay in line with inflation. It similarly makes matters more difficult for workers when the State periodically demands a certain amount of their homes when the former is (supposedly) the real owners thereof. Many other taxes could be mentioned here, but these are the most important one for this point.
Another clear cause of class antagonism is inflation, commonly understood as the decrease in the purchasing power of the currency through an expansion of the money supply. In countries with a central bank (like the Federal Reserve in the U.S.), new money is continually printed “out of nothing” and sent into circulation through the purchase of government securities like the U.S. Treasury bond. The result is, ultimately, that everyone’s money will eventually be less worth, but it will first go through so-called “Cantillon effects“, where those who get the new money the earliest will get more from it than those who get it later when prices have increased. People’s savings will over time be less worth, causing more difficulties for many workers in paying bills and keep being able to afford basic necessities.
On the other hand, one would expect those who get the new money in the earliest stages, for the most part, to be quite wealthy and well-connected politically to have acquired such a position. In essence, the wealth of the majority of the population is thus extracted by bankers, politicians, and crony tycoons. This is a very literal case of the “proletariats” being exploited by the “bourgeoise”, to put it in Socialist lingo, but is clearly the result of an incentive structure put in place by the State rather than the “market”. (I document this point more in-depth here). When combined with low interest rates, the central bank also uses inflation to create artificial business cycles, which in times of downturn (especially the Great Depression and the Great Recession) negatively affects workers and the majority of the population in general in a process of readjusting the economy from the malinvestments done as a result of the artificially low rates (more on this here).
Though regulations on businesses are often considered necessary to protect workers from being “exploited” based on the premise laid out at the outset, ignoring the significance of competition here leads not only to a wrong theory but to real harmful effects when applied. The precise consequences of a regulation may vary, but what they tend to have in common is that it makes it necessary for businesses to reallocate money and resources to comply with the newly introduced regulation(s). They are thus placed at an increased risk (the significance of which depends on the regulation) to face losses, leading certain firms having to make significant adjustments. An increase in the minimum wage, for example, places many employers hiring low-skill workers in difficulty as they may first try to increase prices (making customers worse off), but if that leads to a strong enough decrease in demand, he’ll eventually have to cut hours of some employees or fire them (naturally making the workers worse off), or have to close down completely if he was sufficiently reliant on those workers for his business model (making both the customers and the workers worse off).
New, small businesses are the most negatively impacted by this as they don’t have a very broad array of resources to economize and reallocate to satisfy the regulators’ demands. This is why many figures in large – often multi-national – companies actively advocate and lobby the State to implement more heavy regulations: To restrict competition. When competition is restricted in this manner, the impact of the market “self-regulating” fix to the Socialist objection regarding class antagonisms is mitigated, at the behest of the workers who operate under working conditions they find unsatisfactory without competitors indirectly “sanctioning” against this, and the customers who don’t get access to alternatives that they would otherwise, possibly with higher quality and lower prices. (I’ve written more about this here)
#4: Taxes on the Business Owner
Similar to the case with regulations, businesses also suffer unnecessary waste of resources due to taxes levied on its operations. Most importantly there is the corporate tax – analogous to income tax for the worker – through which the State seizes a portion of the income or capital of companies. With less overall money, there may be fewer bonuses and lower wages for the employees than they would’ve earned otherwise, and may have to downsize in order to stay afloat if the tax takes too heavy a toll on the business. Furthermore, the State not only extorts the company to obtain a portion of the new money streaming in but also of the value of the personal assets (i.e. financial securities, real estate, bank deposits, etc.) in the current holdings of the entrepreneur.
Another extremely harmful tax is the tariff, most accurately described as a tax on imports. The theory required to explain this is somewhat subtle and won’t be delineated here (research division of labor and comparative advantage for more details), but the essence of it is that customers and workers are ultimately worse off as a result of tariffs as they disincentivize the importation of higher quality and lower cost goods and services offered by foreign companies at the behalf of their domestic competitors, and slow the process of labor specialization/division increasing overall real wages.
#5: Disincentivizing Private Charity
When the State has declared itself responsible for taking care of the worst off in society through other people’s money, private citizens will eventually feel less obliged to contribute to charities or help the needy in other ways. This may either be because they just think that one doesn’t need to take on that task when the State does it, or that one considers his paying taxes to indirectly be a contribution to the work they do. Either way, this becomes a problem when the programs turn out to be exploited, wasteful, cause negative side-effects, or a mixture thereof. In fact, this turns out to be the rule rather than the exception, due to the incentive system behind bureaucracy in contrast to private businesses and can be seen in cases like education, health care, housing, mail delivery, and others. When these programs fail, will private citizens provide help to the ones who have been let down from broken promises by politicians? Maybe, and maybe not, but probably increasingly so over time. However, it sounds probable that it would at least tend to be less than it would be had the program never been implemented, and its errors tend ever so much only to be used as a justification for more funding rather than illustrating either the complete waste of the program or the need to make the current funding be used more economically, at the expense of both those the program is directed towards and those being extorted to fund it.
Having gone through all of these points, it seems indubitable that the State infuses into the private sector unnecessary antagonism between the economic classes at many levels in total stacking up to enormously damaging consequences for the people at the bottom. If Socialists, Social Democrats, and others reading this consider the concern of class antagonism laid out at the outset as of high importance, you should here note that the State is the ultimate cause to most of this problem. In light of this, the only way to maintain logical consistency and show that you actually want to solve the matter is at the least to oppose State intervention in the economy and become a free-marketeer, or go the extra step to become an Anarchist and denounce the State as a completely illegitimate, immoral, and unnecessary institution. Unless the ultimate cause of a problem is uprooted, it will never be solved completely, only the symptoms mitigated, and dismantling the State is the only way to be sure one can appropriately release the population from the antagonism spurred thereby either as a side-effect or through conquer-and-divide tactics.
Stefan is a Norwegian high school student studying economics in his spare time, with aspirations of eventually taking a Ph.D. in economics and afterward contributing to growth in the private sector. He’s a follower of the Austrian School of Economics, drawing inspiration mainly from Claude-Frédéric Bastiat, Ludwig von Mises and Murray Rothbard, and blogs regularly about thoughts on a variety of topics, mainly economics and politics, but also philosophy, psychology, and history.
This article was sourced from Mises Revived.