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Every human being has the right to clean water. ... I strongly be-
lieve that public control and public administration of the public's
water supply is the only way to guarantee the universal human right
to access to clean water.

Such statements make the difference between political state-
ments and economic analysis stand out in sharp contrast. No
doubt both politicians and economists can agree on the desirabil-
ity of everyone's having water to drink and that it is better when
this water is not dirty. But to call water a "right" is meaningless in
economic terms and questionable in legal terms. The American
Bill of Rights is essentially a list of things that the government is

This is discussed in greater detail in my Knowledge and Decisions.
28 APPLIED ECONOMICS


prevented from doing to you. Rights in the sense of exemptions
from the power of government are very different from rights to
things that can be provided only by incurring costs. Your right to
free speech does not require someone else to pay for broadcasting
what you say or to publish it in a newspaper or magazine. But if
you have a right to water, then others are forced to pay the in-
escapable costs of getting it to you.
This issue then amounts to the question whether water”or food
or clothing or anything else”will be better provided to more peo-
ple if it is paid for collectively through taxes or individually
through purchases. Food is as vital to human survival as water is,
and yet countries where food has been grown and distributed col-
lectively by government have not been better fed than countries
where all this has been left to the marketplace. Indeed, two Soviet
economists pointed out that "not until the 1950s were we able to
exceed the 1913 per capita level of agricultural output" under the
czars, and that even in the late 1980s when they wrote, per capita
"meat consumption still remains lower than it was in 1927"”
which is to say, before Stalin collectivized agriculture. The Soviet
Union was just one of a number of countries that had once had
surplus food to export before the government took control of agri-
culture and which later had food shortages, hunger and sometimes
even starvation, and which were forced to import food, even when
there was ample fertile soil within the country. People in these
countries might have had a right to food, sometimes explicitly
specified, but what they were lacking was actual food to go with
that right. Conversely, denying people a right to food is not deny-
ing them actual food. Countries where food is provided through
free markets are often countries where obesity is a far greater prob-
lem than malnutrition.
To analyze the market does not preclude the existence of non-
market activities or prejudge their effectiveness, any more than au-
Politics versus Economics 29

tomotive engineering precludes the existence or prejudges the ef-
fectiveness of alternative modes of transportation. What economic
analysis of markets does is utilize a body of knowledge, analysis,
and experience that has accumulated and developed over a period
of centuries to systematically examine the consequences of various
economic actions and policies. The fact that these consequences
can determine the poverty or prosperity of millions of people”
and billions of people worldwide”is what makes it important to
understand economics.
The real question is not which system would work best ideally,
but which has in fact produced the better results with far from
ideal human beings. Even with the more modest task of evaluating
different policies within a given system, the real question is not
which policy sounds more plausible, or which would work best if
people behaved ideally, but which policy in fact turns out to pro-
duce better results with actual people, behaving as they actually
do. This latter question will be addressed in different contexts in
the chapters that follow.
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Chapter 2


Free and Unfree Labor



A student asked his history professor: "Where did slavery come
from?"
"You're asking the wrong question," the professor replied. "The
real question is: Where did freedom come from?"
Slavery is one of the oldest and most universal of all human in-
stitutions. Slavery has existed among peoples around the world, as
far back as recorded history goes, and archaeological explorations
suggest that it existed before human beings learned to write. No
one knows when slavery began. It is the idea of freedom for the
great masses of ordinary people that is relatively new, as history is
measured”and this idea is by no means universally accepted
around the world, even today. Slavery was stamped out over most
of the world during the course of the nineteenth century, but it
still survives here and there in the twenty-first century. Moreover,
there have been, and still are, other kinds of unfree labor besides
slavery.
One of the many freedoms we take for granted today is the right
to choose what kind of work we will and will not do. Yet, for many
centuries, there was no such choice for most people in most coun-
tries. If you were the son of a shoemaker, then your job would be
to make shoes. And if you were the daughter of a farmer, there was
a whole range of chores that you would perform while growing up
and a still larger range of domestic responsibilities waiting for you

31
32 APPLIED ECONOMICS

after marriage. The difference between "free" and "unfree" labor in
such times was whether or not you were paid for your work or were
forced to do it without financial compensation. These forced
labors might be temporary and range from drudgery in the fields
of the nobility or serving under those same nobles in their military
campaigns, after which you were allowed to return to your own
farming or to other work. People who were less fortunate were
full-time and lifelong serfs or slaves, with this status also being in-
herited by their children.
While free labor has become the norm in much of the world to-
day, compulsory labor still survives, even in free democratic coun-
tries, in such forms as military drafts and compulsory jury duty.
Outright slavery still exists in a few other countries, such as Mau-
ritania, Sudan, and Nigeria. In remote parts of India, family mem-
bers still remain in bondage over the generations because of debts
contracted by some ancestor before they were born”a situation
sometimes called debt peonage and sometimes called simply slav-
ery in one of its variations.
Despite the sharp dichotomy between free and unfree labor in
principle, in practice those who are free may nevertheless have
many restrictions imposed on them by laws and policies, such as
requirements to get an occupational license or belong to a labor
union in order to work in some occupations, when in fact both
union memberships or the necessary licenses may be arbitrarily
limited in numbers. The wholly voluntary agreement between em-
ployer and employee in a free market exists as a model but not al-
ways as a reality. The employer's freedom to hire whoever will work
for him is heavily circumscribed by child labor laws, anti-discrimi-
nation laws, and other regulations and policies, as well as by labor
union contracts.
At the other end of the spectrum, even some slaves have had op-
tions, especially urban slaves, many of whom chose their own em-
ployers and simply shared their earnings with slaveowners who let
Free and Unfree Labor 33


them exercise this option. This practice existed as far back as the
Roman Empire, though to varying degrees at different times and
places.


FREE LABOR

The advantages of a free labor market benefit not only the worker
but also the economy. Since pay is usually based on productivity
and workers tend to seek higher-paying jobs, this whole process
tends to place people where they can contribute the most to the
production of goods and services that other people want. Arbi-
trary restrictions on who can work where tend to sacrifice not only
the interests of those who are denied jobs but also the interests of
consumers, who are denied an opportunity to get the goods and
services they want in the abundance they would like and at as low
a price as possible. Nevertheless, most people would prefer not to
see little children working in coal mines, as they once did, or in
factories alongside powerful and dangerous machines. Virtually
everyone would also prefer not to have anyone who wants to per-
form surgery be authorized to do so, with or without the benefit of
medical training. Some occupations, such as burglar, are banned
outright.
In one way or another, for good reasons or bad, there are many
restrictions on free labor and on those who employ free labor.
Among these restrictions are occupational licensing, job security
laws, and minimum wage laws. It should also be noted that much
of what is called "labor" is in fact capital.


Human Capital
Most people in modern industrial societies are called workers or
labor. However, people represent not only labor but also capital in-
vestments. Schooling, job experience, reading, experience gained
34 APPLIED ECONOMICS


tinkering with cars or computers, as well as absorbing the knowl-
edge and experience of parents and peers, all contribute to the de-
velopment of the skills, insights, and capabilities on the job that
economists call human capital. Nor is the distinction between hu-
man labor and human capital just a set of abstract concepts with-
out consequences.
The ability to labor is usually greatest in early adulthood, when
people are in their physical prime. Back in the days when many
workers did in fact contribute little more than their physical exer-
tions, a middle-aged manual laborer was typically less employable
than a young man in his twenties working in the same occupation.
But today, when most people who work for a living earn more as
they grow older, this is much more consistent with their earning a
return on their human capital, which tends to increase with age.
The human capital concept is also more consistent with narrowing
income gaps between women and men, as physical strength counts
for less and less in an economy where power increasingly comes
from machines rather than human muscle, and an economy in
which information and high-tech skills count for more.
While the growing importance of human capital tends to create
greater equality between the sexes, it tends to create greater in-
equality between those people who have been assiduous in acquir-
ing knowledge and mastering skills and those who have not. In
addition, like every other source of greater rewards for work, it
tends to create greater inequality between those who work and
those who do not. American families in the bottom 20 percent of
income earners supply only a fraction of the hours of work per
year supplied by families in the top 20 percent. Both the rising in-
comes of more experienced workers and the growing inequality in
incomes in free market societies show the influence of human
capital.
Free and Unfree Labor 35


While almost all jobs today provide both pay and experience, at
one time it was common for inexperienced and uneducated young
people to take jobs that paid them nothing. This was obviously an
investment of their time and labor for the sake of acquiring human
capital. Apprenticeship, with and without pay, has been a cen-
turies-old institution in many parts of the world, and unpaid labor
was not uncommon in the United States as late as the Great De-
pression of the 1930s, when people desperate for work took jobs
without pay for the sake of gaining work experience that would im-
prove their chances of getting paying jobs later.
Back around the time of the First World War, a young black
American named Paul Williams decided to become an architect”
a virtually unheard of occupation for someone of his race at that
time”and turned down the only paying job he was offered at an
architectural firm, in order to go to work as an office boy without
pay in a more prominent architectural firm, from which he ex-
pected to gain more valuable knowledge and experience.1 He was
clearly thinking beyond the initial stage of his career.
As the later stages of his development unfolded, Paul Williams
went on to have a long and distinguished career as an architect, in
which he designed everything from mansions for movie stars to
banks, hotels, and churches, and participated in designing the
theme building at the Los Angeles International Airport. Like
people who invest money in stocks and bonds, he had invested his
time and labor to acquire human capital that paid off as his pro-
fessional career unfolded.
Another example, from the nineteenth century, was a poverty-
stricken young man, dressed in ragged clothes, who applied for a
job as sales clerk in a store in upstate New York. His name was

1
After he showed up for work, however, his employer decided to pay him a small salary, after all.
36 APPLIED ECONOMICS


Frank Winfield Woolworth, later destined to become head of a va-
riety store chain that bore his name. But, as of 1873, he was just a
very unpromising-looking prospect. Here was the scene:

The shop owner fingers his mustache thoughtfully. The boy before
him is clearly green, but he does seem sincere. Still, times were
tough and at least twenty experienced candidates would soon be
clamoring for this job.
And all in all, the boy is a sorry excuse for a potential salesman.
But the owner sees something there.
"Okay," he barks. "The job is yours. You start Monday!"
Trying to control his elation, the young man asked: "What are
you going to pay me, sir?"
"Pay you!?" the owner exclaims. "You don't expect me to pay you,
do you? Why, you should pay me for teaching you the business."

The terms might seem harsh”the first three months with no
pay”and even exploitative. But who benefited most from this
deal?2
Woolworth was a conscientious worker, but he was also a coun-
try bumpkin who was so inept that his duties were at first confined
to sweeping the floor, dusting the shelves, and doing other work
that would not be considered too challenging for him. The other

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