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writing for godot

US, the book, Part 8, Free-Market Doesn't Work if Negotiating Parties Aren't Equal

Written by Tom Cantlon   
Saturday, 10 April 2021 08:41

This is a section of the book:


Everything is Done By US

We Can Make it For US

by Tom Cantlon


The list of links to chapters can be found at:


This time, starting with pay as an example, an absolutely essential principle: the free-market only works if negotiating parties have roughly equal leverage.


The Two Pay Systems


There are two ways that wages get set. There's the way it commonly happens now, which shortchanges US, and then there's the way it ought to be done, which gives US our full value. It's important for US to have in mind a solid picture of that second way, the way it ought to be done, because we have to be clear about what our goal is in order to make progress toward it.

The way that commonly happens now we can call the "desperation" system or the "divide and conquer" system. You are one lone person negotiating with a company, a small negotiator trying to strike a deal with a giant negotiator, or at least a negotiator bigger than you. And that bigger negotiator has all of the cards. After all, if you demand too much they'll just say, "No. Thanks for applying. Next!” Sure, sometimes employers have a hard time finding enough good workers, but the general level of what's expected for a given type of work has been set by that typical pattern of a lone applicant negotiating against a whole company which holds all the cards. For instance, the work you do might be worth $25 an hour, even after the owners get a worthwhile profit, but if they can get enough people to do it for $15 an hour, that's all that will be paid. It's a matter of how desperate people in your field have been and how low companies have typically been able to go and still get workers.

Yes, you could go to one of those websites that tracks what jobs in a given field typically pay, but that's still just telling you what people have typically settled for. It has nothing to do with what your work is worth.

The second way, the way that wages should be set, is about exactly that, what your work is worth to the company. Call it the "full value" system. To make a simple example, if one hundred workers in a widget factory make 1,000 widgets a day, and those 1,000 widgets sell for $X, then after expenses are paid (raw materials, electricity, cost of owning the building, everything else) and the owners and investors get just enough profit to make it worth doing, then the rest is what the workers are worth. Their pay should be based on that. After all, the owners got their profit, and the workers did the work, so the workers should get what their work is worth.

Of course, that's a very simplified example, and there are many other factors involved. How do we measure the value of the work of answering the phones or sweeping the floor or being the shift supervisor? But the general idea that your pay should match the value of your work can hold true. What value any job creates can be roughly determined by some research into how much profit the company makes and by knowing what different positions at different levels of skill and responsibility are worth relative to one another. Even where the exact profit of a smaller, private company can't be known, the value of similar positions in bigger public companies can be known. By that method the typical value of such work can be determined.

The final details can always be sorted out in negotiations. That's the free market at work. The free market is always the best way to sort details like which positions are worth more and how much more and which employees are worth more. Free-market negotiations are the way to sort out those details; it just has to be negotiations between a company, on the one hand, and a group of employees who have the necessary information and leverage, on the other hand. It has to be a roughly equal negotiation. It doesn't work if it's between a company who has all the cards and tiny individuals who have none.

Consider the negotiations of top-name sports players. They negotiate contracts worth seemingly absurd amounts of money. But why can they manage to do that? Because major league teams make enormous amounts of money, and a top player and their agent have a pretty good idea just how much of that enormous income is as a result of a top player. They know how much more in ticket sales and other income a team is going to make if they're winning, and they know they can be a key part of that winning, so they know what they're worth. So they demand that and they get it.

For normal workers we're not talking about getting absurd amounts. It's just that negotiation should likewise be based on your worth to the company. Your work might only be worth $15 an hour or maybe higher at $25 an hour, but if that's what you're worth, that's what you should get. If you're value to the company, after expenses and enough profit to make it worthwhile for the investors, is $25 an hour, then you should be getting that. Not $22 an hour or anything less. Just like that baseball player, if you can discover that you're worth $25 an hour, and if you have the leverage to get what you're worth, then you can get that pay.

For very small businesses, it's not practical to think of them having an employee group or having a financial analyst to study what the business is making. But that's not necessary. When all of that does get sorted out at bigger businesses, then what a particular type of job is worth will be known, and workers at smaller businesses will know what their work is worth.

Knowing what you're worth is just a matter of workers being organized enough to get some research done on it. Having the leverage is just a matter of how the laws and rules work. Politically it's difficult to get there, but technically it's straightforward.



Why should the owners get only just enough profit to make it worth doing? Why not make a killing at it? Because when the free market system is working right, then price competition should drive the price down to just enough. Companies have to keep their prices low to compete with one another, and that means they can't just slap on a huge extra profit on top. Their competitors would sell for less and undercut them and they'd go out of business. The product has to sell for enough money for the owners to make enough profit to make it worth doing, but not more than that. There are exceptions, like when a company invents something new and has exclusive sales of it or when we read about drug companies getting exclusive rights to some essential drug and charging through the roof for it, but generally speaking competition drives price down to what is a fair price.

A "fair" price has to include enough to pay workers a truly living wage though. Otherwise it means workers aren't getting paid enough and end up on food stamps and Medicaid and have no savings to cover surprise expenses and no savings for retirement. Then we end up with all of the problems of society that happen when people can't really pay their own way and can't thrive like their work should enable them to do. These are working people, mind you, not anyone looking for anything free. A fair price has to include a proper living for them or nothing else works right.


Price of goods

Won't raising wages just raise the cost of everything to the point that it costs so much more to live that you're right back where you started? No. This is because wages are just one part of the costs of making a product. Studies by economists, studies that are widely accepted, find that the price of goods does not go up nearly enough to offset the benefit of higher wages. (Links to the studies are at the end of this book.)

And remember, part of the problem is that the way the pie is sliced has been steadily shifting for decades out of the hands of wage earners. Part of what raising wages is all about is shifting the way the pie is cut back to where it used to be, more in favor of the people doing the work.

All of the wealth of this nation is created by the people who do the work. Your work is valuable. The simple rule of thumb holds true. You should get the full value of your work.


Equal Negotiators


The previous section touched on the idea of equal negotiators, but it is a key concept that needs to be at the core of our understanding of what it takes to have a country for US.

The free market is a wonderful system and everything in this book is compatible with it. This book even advocates doing things in ways that are even more faithful to free market principles than the way things are done now.

The simplest free market example is if you have some extra vegetables from your garden and your neighbor has extra firewood. The two of you negotiate what is a fair trade. If your neighbor wants too much of your vegetables in exchange for their firewood, then you move on to some other neighbor to negotiate with. When the neighbor with the firewood can't get anyone to take their over-valued deal, then they'll be forced to bring down what they want. That works both ways and works amongst all the neighbors until pretty fair trades are worked out for everyone. That same principle happens throughout the economy and generally works well.

But then again, often it doesn't. What's wrong when it doesn't? There's a missing ingredient: rough equality.

When you and your neighbor negotiate, you are equal players. But often negotiators aren't equal. If you have to negotiate with the local hospital chain for some procedure, which it seems they want an outrageous price for, how do you negotiate with them? Likely you don't. They'll say that's the price, period. Pay it or no surgery for you.

If your neighbor with the firewood grew that into a huge lumber business, and you went offering a few vegetables for some firewood, they very well might laugh you off the property or require a much greater value in money for the wood. What used to be a perfect little trade has now completely failed. The only thing that has changed is that you are no longer equal-sized negotiators. It just doesn't work that way.

In certain circumstances a lot of small negotiators can have an effect much like one big negotiator. If one brand of canned beans raises their price much higher than other brands on the same shelf, many individual shoppers will stop buying them and the company will be forced to bring their price down. That works for beans, but it's not likely to work for you and the hospital. It's not likely to have much effect on you looking for a good job either.

But there's a way to fix that problem. In the case of that high-priced surgery, when some big insurance company negotiates with the hospital for what price it will accept for the procedure, that's two big, roughly equal negotiators, a hospital chain and an insurance company. They'll wrestle to some compromise, to some price that's truly good because it's a middle point where both sides get a fair value. That's the free market working like it should. But it only happens because they are roughly equal parties.

Wages could also be wrestled to a point that's fair to both sides, the free market working like it should, but only if employees are on equal footing with the company.

Some job applicants do hold out for higher pay and get some increase, but they still really have no idea if that's close to what their value is to the company. They just know they got more than the company's opening offer, but still no idea if that's the full value their job should bring them.

This problem of applicants not knowing what value their job would bring to the company and having no leverage anyway varies depending on how high of a position is being applied for. That is, the most valuable employees, the very highest engineers and technical innovators and programmers and high-level executives, have a better idea what their work is actually worth and more leverage to hold out for salary close to that. But the middle-level applicants are only guessing about their worth, and most of the people who actually do most of the work have no idea. It will only be an economy for US when most of US, that is, as near as possible to all of US, are actually getting our worth. And that is essential to our having an overall healthy and well-functioning country.

Everything about wages in this book is about free market negotiations, but it has to be a fair negotiation. The powerful have gradually been shifting things in their favor so that it's not a fair negotiation. What is suggested here is simply that we regain our leverage so that the dealing can be fair, and we can receive what a proper free market negotiation should get us. That only happens when negotiations are between roughly equal parties.

As it is, there are many circumstances where you have to negotiate but have no leverage. If only one mobile-phone service provider in your area has good service, you pay its price or do without. If the good internet service in your area comes through the cable TV system, you pay that price or do without. Chances are that's close to how it goes when you're looking for good work, too. Either take their offer, even if you have no idea if it's close to what your work is worth, or do without. Since that's true in many facets of life and that's true for many millions of people across the country, we are living in a country that, to a large extent, is not a free market country. It may be a free market for corporations dealing with one another, but it's not a free market for the individuals, for US. And true free market negotiations are essential to our having a country that runs for US. We have to arrange how we negotiate for wages and other things in ways that make for roughly equal negotiators, or we don't really have a free market or a country that's for US.



Proper wages are a good starting point, and a good measure of how we're doing, but the country will only be for US if the same is true of every other aspect of life. And, is it true there just isn't enough money for everyone to have a decent life? your social media marketing partner
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