Says this writer: "To base social reform on the division of profits is as absurd . . . as trying to build Egypt's pyramids upside down"

S. E. McGORMAN May 15 1943


Says this writer: "To base social reform on the division of profits is as absurd . . . as trying to build Egypt's pyramids upside down"

S. E. McGORMAN May 15 1943


Says this writer: "To base social reform on the division of profits is as absurd . . . as trying to build Egypt's pyramids upside down"


Editor’s Note: A number of requests having been

received for its republication, we herewith present a digest of Mr. McGorman’s “Work and Wages,” first published in Maclean’s, October 1,1937.

THIRTY years ago, Gillette’s handbook of costs was a standard reference work in every engineer’s library. It was written by H. P. Gillette, who toward the end of his active career made an intensive study, not of what wages should be but of what they actually had been; measured not in the changing values of dollars and cents but in the amount of necessities of life which they would buy. The formula which follows was published with supporting data in Engineering and Contracting, August 3, 1921 :

The buying ix>wer of M - Total dollars in circulation,

the average wage * MV V —Number of times money is

yjj ~p~ turned over.

--= Z^ii p = Population.

1 -Mv

^SpE E = Units of commodities per

This is equivalent to saying that wage and salary earners receive two thirds of everything produced, of the entire national income, whatever that may be. The accuracy of this formula was checked back to 1890 by Mr. Gillette. While sufficient statistical data are lacking to check it further, there is reason to believe it was substantially true from the beginning of time.

The United States Department of Commerce gives the following table. Compare the figures in the first line with Mr. Gillette’s theoretical wages and salary figure of 66.6 of everything produced.

Tabic No. 1

Total Compensation of Employees


Business Savings..............................


Balance Foreign Accounts..............

Net Rems and Royalties................

Withdrawals of P'armers, Small Merchants, etc........................

Percentage of Total National Income Paid Out

1929 193?

65.5% 63.9% 7.6 5.7

6. 5 10.3

.3 .6

4.3 3.0

15.8 16.5

100 100

1939 1942

67.3% 69.9%

5.3 3.3

........ 3. 1

8.3 4.5

.1 .0

1Î. 8 2.5

16.2 16.7

100 100

This table is a striking vindication of the Gillette theory. Expressed as a percentage of the national income, the wage-earner’s share did not vary by much more than three per cent from his theoretical figure through the greatest boom, the sharpest depression of recorded history, and a global war.

More Income Wanted

NEARLY everyone who says anything at all on industrial questions is constantly pledging himself to some policy “to get the workingman a greater share in industrial production.” These efforts would be much more intelligently directed toward getting the workingman more income, rather than a greater share in the national income, which is an altogether different thing. To get the workingman a greater share may be, and probably is, impossible; fighting over such an attempt may go so far as to wreck civilization, to which end it has already made very substantial progress.

Fortunately, however, the way to a greater income for working people in Canada is wide open. It is to increase the national income; or to decrease the waste of national income at present existing, which will have the same result. The United States Department of Commerce gives a second table.

Tabic No. 2

1929 1922 1942

National Income ... $78,632,OOO.tXX) $48,362,000,000,$119,791,000,000 Paid in Wages and

Salaries............ 51,487,000,000 30,920,000,(XX) 80,293,000,(XX)

Per cent of National

Income............ 65.5 63.9 67.0

These two tables show the supreme importance to wage-earners of keeping the national income high, because theirs is by far the biggest stake in it.

Farmers and small merchants and businessmen of various kinds are their nearest rivals, but their share amounts to only twenty-five per cent of the employees’ share. The moneylender gets about one eighth, the owner of industry about a twelfth, the landlord a twentieth, and all of these classes taken together, one third. When the national income (the value of all things produced) falls, whether through war of the foreign, civil, or class variety, through stupid government policies at home or hostile policies abroad, because of unwise social experiments, natural calamities, strikes or speculative excesses and resulting panics, then two thirds of the loss falls directly and inevitably on the employee class.

Compared with 1929, the loss, in wages and salaries in 1932 in the United States, exceeded twenty billion dollars in one year, an amount about equal to the accumulated national debt from the founding of the republic up to that time, and greater than the total profits of industry in its best decade. Even this does not measure the employees’ loss, for everyone who has an insurance policy or a bank account is a moneylender; and since the number of such lenders exceeds the number of adult males, many employees are also moneylenders.

Equally great is the number of profiteers, since holders of industrial stock greatly outnumber the

employees of industry. Many employees are also landlords; so, when production falls, three quarters is probably a more accurate estimate of their share of the loss than two thirds. Note further that the loss is not transferred to some more favored class —it simply disappears, due to the interruption in the orderly processes of production.

What Profit Division Means

DURING recent years we have witnessed an intense organization drive which has for its object the enrolling of industrial workers into unions. This being such a controversial subject. I wish to make it quite clear at this point that what follows is an arithmetical demonstration of why certain popular policies cannot fulfill the hopes of their sponsors, and why other totally neglected policies have greater possibilities.

This discussion is not an argument for or against labor unions. I am quite willing to concede labor’s right to organize in any way it sees fit.

Further, I am quite convinced of both the possibility and the desirability of raising the living standards of working people.

But much of the hope for great financial benefits through organization is, like almost all speaking and writing on social questions, based on a great and easily disproved illusion; namely that there is an almost infinite profit in industry, and that a more just division of this profit will cure more of our economic troubles.

Much sincere belief in the abundance of profits “awaiting division” comes from an ancient error of logic, that of reasoning from an example— especially one selected for the purpose. Most wellmanaged industries have years of substantial profits, and some very attractive figures can be produced on paper by dividing the profits of the best companies in their best years among their employees. But if the employees are to take the profits of industry they must take also the losses and the taxes of industry, and these are very substantial.

Let us determine what the “take” would amount to if labor got all the profits of industry.

This figure can be determined with considerable accuracy. The average annual profit of all manufacturing corporations in the United States for the eighteen-year period, 1917 to 1934, (Department of Commerce figure), was $1,906,000,000. The average number of employees was not far from ten million so that, evenly divided, each employee would get $190 a year.

This figure is, however, gross and not net. When the owners of industry are deprived of all profit, they are deprived automatically of the responsibilities that go with it. The first of these is the payment of all taxes which fall on them after they receive their profits. These taxes will hardly be less than $66 per year. Next, the employees must provide capital for research expansion and improvements in industry, which will take another $66, judging by past experience. There remains to the employee $66, of which at least $12 will go for union dues, leaving $54, from which will be deducted a further indeterminate amount, since all industrial stocks will be valueless, and since employees themselves (and through the banks in which they deposit their money and the insurance companies in which they insure their lives and property) own very large amounts of them. The final accounting would show employees benefitting by about fifty cents per week, provided there was no loss of efficiency in the manufacturing process as a whole.

Complete unionization of American industry may have many surprising results, but an enhanced living standard for workmen is unlikely to be one of them. To imagine that a sum less than two billion dollars can be divided among the population of the United States in any way whatsoever to affect materially the standard of living reflects little credit on the intelligence of the people who spend so much time devising ways of doing it. To base the whole program of social reform on the division of profits,isasabsurclastryingtobuild the pyramids of Egypt upside down.

Continued on page 48

Work and Wages

Continued from page 22

If Everyone Were Unionized

LESS THAN a ten per cent rise for all industrial employees would have so raised the costs of manufacturing during the eighteen years cited that not only the profits but the reserves of industry would have been used up.

This may seem at first glance to be disproved by the constant spectacle of successful strikes, sometimes at intervals of a few months in the same plant, each strike resulting in a wage increase of ten per cent or more. Let us, however, see what actually happens, taking the country as a whole. There are in the United States some five million members of unions, six million at most (1937 figures). There are about fifty million gainfully employed. When, due to wage increases to union labor, the price of union-made goods is raised, say by fifty million dollars, it is roughly true that each person gainfully employed, union or non-union, contributes one dollar. But the unionized workers get all the increase, so that they have a nine-dollar profit on the transaction, against the non-union workers’ loss of a dollar. If twenty-five million people are unionized, the union i members’ profit is cut to one dollar; and if all fifty million could be unionized, it disappears altogether.

The ability of union labor to benefit from the forcing up of prices on union-made goods depends absolutely on restricting the membership of unions to a relatively small group. The campaign to unionize everyone on a payroll is self-destructive, and must of necessity prove a bitter disappointment to multitudes of its enthusiastic supporters. Despite all the present enthusiasm over the right to organize into unions, what workmen want is not more organization but more money.

When a union is able to force an increase in wages without any inj crease in production, that increase I comes out of somebody’s pocket. If the rise in wages is balanced by a rise in prices, pretty nearly everybody is affected directly or indirectly; but if no rise in prices takes place, the wage increase is borne by the “capitalists.”

More Stockholders Than Employees

BECAUSE nearly all our wage discussions are carried on in a jargon borrowed from Europe and largely invented by Karl Marx, there is a general impression that business is owned by a few very rich men and that the “exploited” are many and very, very poor.

Actually nearly all great corporations have more stockholders than employees. American industry as a whole has fifty per cent more. Even the great banks are owned in quite small amounts on the average; and the people to whom they owe money (the depositors) are both more numerous and poorer on the average than those who owe the banks money.

Whatever else may be the result of casting down the capitalist from his seat, it cannot be “a general rise in the American standard of living,” as the popular phrase goes. There are too many American capitalists, and almost all of them are employees. The great numbers of people having insurance policies, real estate and industrial stocks leave no possible doubt that almost all employees who have the instinct to save have an investment of some kind.

Any condition which will destroy the investments of the rich will destroy with equal efficiency the investments of the poor. In the end, the gains which some would win by this process would be balanced to a large extent by losses inflicted on other people of exactly the same class and of no greater wealth.

Laws Do Not Produce Wealth

AS A PEOPLE we have a childlike - faith in legislation and of recent years have been willing that anyone should undertake the remaking of our financial system, even though he had never had any success in any line of human endeavor. If he claimed to know the needs of the poor it was enough. We would take his claims as demonstrated fact against all advice of training and experience.

The result of this state of the public mind has been a flood ofwageraising legislation. Many criticisms can be made of such legislation. I make one only—IT DOES NOT RAISE WAGES.

The most pretentious measure was the NRA. Dr. Leo Wolman, Chairman of the Labor Advisory Board of NRA, a sympathetic witness, has completed a most careful study of the results of that short-lived experiment. He divided wage earners into thirteen groups and found that in two only, soft coal and iron miners, had living standards gone up, and in all the other eleven groups they had gone down. Money wages rose, but buying power fell. These findings are published in detail by the National Bureau of Economic Research, New York.

The second great attempt was in France, where the Popular Front gained power by the promise of a fifteen per cent increase to everyone and promptly devalued the franc to make it possible. As a result the French workmen were soon worse off than before. Furthermore, fighting over the division of what did not exist split France into two irreconcilable camps ready for the Class War. Herr Hitler has good reason to bless the “Front Populaire.”

Laws do not produce wealth. Only a combination of natural resources, intelligence, and labor produces any wealth, beyond some very limited food supplies which grow wild. Living standards are set by production; they cannot be set by law. If a proposed bill can set a minimum wage of seventy-five cents an hour for everybody regardless of what he produces, it is foolish to stop there. The wage can quite as well be set at $7.50 per hour.

While laws cannot produce wealth, they can distribute it; and if there were enough wealth this would do as well. But there is not. And much harm is done by constant and irresponsible talking and writing about the age of abundance when there is no abundance.

If a dietitian were asked to specify the amount and variety of food the average family should have for full health and vigor, and if the result were multiplied by the number of families, the result would represent an amount of food which no nation ever had. Furthermore, no nation ever produced a suit of clothes per man per year. In 1929 the U. S. A. produced twenty-nine suits for every fifty-nine men; in 1934, one overcoat for every eleven men, and one pair of pants for every three men. No nation has ever had one small, livable room per person. We have not solved the problem of production, as is so often claimed. Laws will not correct the matter. It can only be done by changing the ideas, the habits, occupations, methods of life, and place of residence of millions of people. To bring the three primary essentials of food, clothing, and shelter up to where they should be, would change the entire face of the country. The problem goes much deeper than any change in the financial system. If we could have a really effective and widespread religious revival, the problem might be solved.

In common with most engineers, I believe the abolition of poverty, at least for people of normal intelligence and industry, to be quite possible under any system, and much more probable under conditions of democratic freedom and capitalism than under any other. The only state in which living standards cannot be raised is that state in which everything is done as well as it can be done. Merely stating the problem in that form shows the possibilities to be very great, but they are possibilities only capable of realization by the harmonious and intelligent co-operation of great numbers of people. No trick of legislation, no magic applied to the money system, is good enough.

A good first step would be to get our discussions out of the language and atmosphere of revolution and into the everyday language of intelligent discussion, based on facts as they are, and not on theories, however pleasing to fancy. To this end, labor, business and government can well afford to co-operate.


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