Profits and Payrolls
AUGUST 01, 1979 by HENRY HAZLITT
Henry Hazlitt, noted economist, author, editor, reviewer and columnist, Is well known to readers of the New York Times, Newsweek, The Freeman, Barron’s, Human Events and many others. Among the more recent of his numerous books are The Inflation Crisis, and How to Resolve It and a revised edition of Economics in One Lesson.
The most persistent and widespread economic myth for nearly the last two centuries is that the mass of the workers are inexcusably underpaid. This contention was put forth in its most extreme and vehement form by Karl Marx and Friedrich Engels in The Communist Manifesto in 1848. The workers, they tell us, are mere "slaves" of the bourgeois class; they are systematically "oppressed"; they are subjected to "naked, shameless, direct, brutal, exploitation."
Insofar as Marx and Engels offered any argument for this accusation, it was based on David Ricardo’s worst mistake, the Subsistence Theory of Wages, in turn derived from the Malthusian doctrine that population persistently tends to outgrow the means of subsistence, and therefore wages tend to fall to or stay at the minimum level at which workers can maintain life.
Marx and Engels combined this with another false but apparently indestructible Ricardian error—that prices are determined by costs of production. But they gave the doctrine a sinister twist of their own: The cost of production of a worker is merely the cost of barely keeping him alive. So: "The average price of wage-labor is the minimum wage, i.e., that quantum of the means of subsistence which is absolutely requisite to keep the laborer in bare existence as a laborer. What, therefore, the wage-laborer appropriates by means of his labor merely suffices to prolong and reproduce a bare existence."
This grotesque logic sufficed for Marx and Engels. They never condescended to consult the facts. They made no distinction between the pay of unskilled and the most skilled labor. And for some reason which they did not explain, the whole subsistence theory would cease to apply once socialism were adopted.
They admitted that in the preceding hundred years, capitalism (which they then called "the bourgeoisie") had "created more massive and more colossal productive forces than have all preceding generations together." But apparently none of this went to the workers; none of it raised wages. They even argued that increased machinery "nearly everywhere reduces wages to the same low level," and that the chief effect of "the unceasing improvement of machinery" is to make the livelihood of the workers "more and more precarious."
In The Communist Manifesto the explanation of why the wages of labor can never rise above a mere subsistence level is given barely half-a-dozen lines. When, years later, Marx attempted to elaborate this explanation in his three-volumed Das Kapital (Volume I in 1867, and Volumes II and III completed by Engels in 1885 and 1894 respectively after Marx’s death in 1883), Marx fell into so many contradictions and so much obfuscation that the book is all but unreadable. In an analysis published in 1896, the Austrian economist Eugen von Boehm-Bawerk made mincemeat of the whole argument. Yet in spite of their flagrant absurdities, Marx’s theories, giving unmatched expression to class hatred, continue to wreak increasing devastation in the world after more than a century.
Marx never attempted to state exactly what percentage labor was paid of the value of the product it helped to create. But in 1905 a prominent socialist, Daniel De Leon, misinterpreting some figures in the United States Census of Manufactures, declared that the American worker got only $20 for every $100 worth of goods that he produced, and that "somebody else" got the other $80. This misstatement was endlessly repeated—and accepted—by many politicians and others who should have known better.
Substantially the same belief persists today. Public opinion polling by the respected Opinion Research Corporation has found that the consensus of most Americans is that in the two-way division between aggregate corporate employee compensation and the net profit after taxes left for the stockholders, the latter get about 75 per cent and only 25 per cent goes to the employees.
The truth is the exact contrary—and even more than that. Preliminary figures for the calendar year 1978 show that the employees of all the corporations of the country received 89 per cent of the two-way split and the stockholders were credited with net profits after taxes of only 11 per cent. For the last year for which final figures are available, 1977, the employees got 89.4 per cent of the division and the owners were credited with net profits after taxes of only 10.7 per cent. They did not actually receive that much, but dividends amounting to only 4.5 per cent of the combined total.
In the whole thirty-year period from 1949 through 1978 inclusive, the employees received an average of 88.1 per cent of the two-way division, the stockholders were credited with an average of 11.9 per cent, and the actual dividends they received came to only 5.3 per cent.
These are official figures. In Table 1 at the end of this article, I present the dollar figures for each of the last thirty calendar years—of total employee compensation for all of the country’s corporations, of profits after taxes, of the sum of these two, and of the amount of dividends paid. In Table 2, I show how these sums compare with each other when converted into percentages.
Before going on to point out some of the crucially important conclusions to be drawn from these figures, I should like to say a few words about the figures themselves. They have been compiled by the Bureau of Economic Analysis of the United States Department of Commerce since the early 1930s. They exist for every year since 1929. Yet they are one of the world’s best-kept economic secrets.
The reason for this is that until very recently these annual figures were published only in the July issue each year of the Department of Commerce monthly Survey of Current Business. This document publishes each month some 40 pages of statistical tables. There are an average of 70 lines to a page, and about 16 columns of figures, making about 1120 separate figures on each page, about 44,800 figures per issue, and 537,600 figures per year. Out of this huge total there are about 40 figures each year—confined to the July issue—summing up the results for the preceding year of the total and the distribution of corporate earnings. This means that these corporate statistics are found in barely one figure in 10,000—and all in the same tiny type as all the rest.
It is not surprising that they have escaped general attention, or apparently even the attention of the great majority of statisticians and economists.
But at this point I should like to pay tribute to two publicizers—one an institution, the other an individual. The institution is the American Economic Foundation, which started to call attention to these payroll-and-profit-division figures sometime in the early forties. The individual is John Q. Jennings, who started to emphasize them in 1939, and who in recent years has conducted practically a one-man campaign in reiterating, promulgating, and pounding in these distribution figures and their implications. For the most part he has met with little success, but he recently found a receptive hearing in Australia. At his suggestion, Australia’s Prime Minister Fraser prevailed upon employers to publish and give prominence to this percentage distribution in their own companies. More than 200 corporations complied. This seems to have had a real effect in limiting union demands and reducing the number of strikes in that country.
Now, when nearly half (46 per cent) of net corporation profits of the larger corporations in the United States are seized for taxes, when on top of this a so-called "windfall profits" tax is being proposed on oil companies, when the public is being told from all sides that corporate profits are "disastrously" high and even "obscene," it is time some of the rest of us started calling more attention to the real facts.
Let us begin with a closer examination of the figures showing the division of corporate earnings between employees and stockholders.
If the reader compares the figures in the thirty-year tables year by year, he will find that in every year, with the sole exception of 1958, total dollar payrolls exceeded those in the year preceding. This is not true of profits after taxes. In eleven out of the thirty years, dollar profits failed
to rise over the preceding year. (Both of these results might be changed somewhat if allowance were made both for the declining purchasing power of the dollar and for corresponding accounting adjustments.) But the figures do emphasize that payrolls and profits tend to rise and fall together. This, of course, is because corporate employment and payrolls are determined by present profits and the prospect of future profits. Any government action that seriously reduces profits must diminish employment and payrolls as well.
We also find a striking difference when we compare the division between payrolls and profits-after taxes in the first ten years of the thirty-year period with the division in the last ten years. In the last ten years, employees have been getting an average of 90.2 per cent of the combined total available for division between the two groups, and stockholders an average of only 9.8 per cent. But in the first ten years in the table-1949 to 1958 inclusive—employees were getting an average of 85.9 per cent and the stockholders of 14.1 per cent. The difference is mainly owing to the higher rates of corporate taxation now imposed.
The contrast remains sharp if we carry our comparisons back even a little further. The figures in my tables have been compiled from those that have appeared over the years in the Survey of Current Business. But at least in the last few years, it is reassuring to report, a table containing similar figures has been appearing in the annual Economic Report of the President. This is a real gain; but the statistical secret has been still pretty well kept because the figures appear on merely one out of 124 tables in the Report, and even that table contains five times as many annual figures as the three we are comparing.
The statistics presented in the Report are not the totals for all corporations but merely for "nonfinancial" corporate business. This fortunately turns out to make little practical difference. In 1977, for example, the combined sum available to the nonfinancial corporations for distribution between employees and stockholders was 94 per cent of that for all corporations. The nonfinancial corporations paid 89.7 per cent of this sum to their employees as compared with 89.4 per cent paid by all corporations.
The Economic Report carries these nonfinancial corporation figures back to 1929. There is an instructive comparison between what happened in 1929 and in 1933. In 1929, 81.6 per cent of the total available for both employees and stockholders went for payrolls; 18.4 per cent remained for profits after taxes. In 1933, 99.4 per cent of the combined sum available went to employees; only six-tenths of 1 per cent was left for profits after taxes. A union leader who knew nothing more about the facts than this might conclude that in 1933 labor was at last getting its "fair share." But when we compare dollar totals, we find that nonfinancial corporation employees received $32.3 billion in 1929, but only $16.7 billion—barely more than half as much—in 1933. The reason is that corporation profits after taxes in 1929 came to $7,300 million, while in 1933 two-thirds of the corporations lost money, and the total net profits left after taxes were only about $100 million. In recent years 35 to 40 per cent of all corporations have annually been reporting losses. Corporations losing money cannot long provide jobs. Employment, payrolls, and profits rise and fall together.
Even if this statistical series of the division of corporate earnings were not available to us, other figures have long shown that employees get the lion’s share of the national income. The Survey of Current Business for March 1979 places the national income for 1978 at $1,703.8 billion, of which $1,301.4billion, or 76.4 per cent, went in compensation to employees. This does not mean, of course, that the other 23.6 per cent represented profits. Most of it went to millions of farmers and independent proprietors, owners of small stores—grocers, butchers, bakers, druggists, stationers, barbers, tailors—as well, of course, as to doctors, lawyers, or professional prize fighters.
Corporate profits after taxes nominally came in 1978 to $118.2 billion, but after the Department of Commerce had made realistic accounting deductions from this inflated figure for "inventory valuation and capital consumption adjustments," these profits after taxes came to only $75.6 billion, or 4.4 per cent of the national income. It is these profits that one high Federal official recently denounced as "catastrophic."
The truth is that—when recalculated to allow for the distortions of inflation—corporate profits are still far too low for the health of the American economy. As George Terborgh, economist for die Machinery and Allied Products Institute, has pointed out (April 1979 bulletin) real corporate profits increased in 1978 only 11 per cent—less than the 13 per cent rise in the GNP. He went on to point out that adjusted after-tax profits of all corporations, as calculated by the U.S. Department of Commerce, were only 5 per cent of their gross product in 1978, and only 5.3 per cent of their gross product even in the fourth quarter of that year, compared with an average of 8.6 per cent during the pre-inflationary period 1947-1965. In short, because of insufficient allowance for inflation, American corporations have been reporting phantom profits. "What inflation has done," concludes Mr. Terborgh, "is to devastate real profits."
This conclusion is confirmed by the recent slowdown in the American rate of productivity improvement. Measured against 1967, our productivity growth has been sharply below that of Canada, West Germany, Japan and other nations. According to figures compiled by the Council of Economic Advisers in the January 1979 Economic Report, productivity was increasing between 1948 and 1955 by 3.4 per cent a year. In the period from 1965 to 1973 this fell to 2.3 per cent, from 1973 to 1977 to 1 per cent, and from 1977 to 1978 to four-tenths of 1 per cent (p. 68). The main reason for this is a falling off in capital investment caused by insufficient real profits and a dismal outlook for such profits.
The present political antagonism to profits is in large part the result of the public’s ignorance of the real facts about profits, and particularly its ignorance of the close dependence of employment, productivity, and wage-rates on profits. But the managers of American business, I am sorry to report, have been in large part responsible for this public ignorance. There is scarcely a big corporation anywhere whose total payroll is not many times as large as its net profits after taxes. But I doubt that there is one big corporation in ten that makes this fact clear in its annual report to stockholders—or bothers to call attention to the comparison. And there are probably even fewer that call attention to the comparison in special reports to their own employees.
Calling attention systematically to these figures would help the corporations immensely in their labor relations—and help them to reduce strikes. Their failure to emphasize or even to make the comparison clear is puzzling. I suspect that the typical management, in preparing its annual report, thinks solely of impressing the stockholders. In its concern to show how well management has done, it tries to show the most favorable profits possible. It seems reluctant to show the stockholders how much more it is paying its employees than it is them. It is not too upset at being compelled by various Federal agencies—including the IRS—to report phantom earnings—to fail to make sufficient deductions, in an inflationary period, from apparent inventory profits and for depreciation and replacement.
Whatever their reasons, the top managers of our big corporations have been incredibly shortsighted in failing to reveal to their own employees and to the general public the incomparably greater sums they are annually and daily paying to their employees than to their owners.
The distributive share between the workers and the owners of big businesses was probably not too much different in earlier generations than it is today. The real difference is that we—at least some of us—now know what the actual figures are. There is no longer any excuse for the rest of us not knowing. For the last thirty years the employees of this country’s corporations have been receiving an average of eight times as much from them as has been credited to the stockholders, and an average of sixteen times as much as the stockholders have actually been paid in dividends. And in the most recent years of that period, the division in favor of the employees has been even more favorable.
This is the exact contrary of the impression we have been receiving during these thirty years, and are still receiving today, from thousands of books, tracts, "studies," histories, novels, and hundreds of thousands of "news" broadcasts, pamphlets and editorials. As a result of this false impression, this constantly inculcated myth, the politicians in nearly all countries are daily burdening, shackling and sabotaging capitalism, and trying to substitute a socialism that would tend only to universalize poverty. It is the duty of all of us who are aware of the critical facts to try to make them sufficiently known before it is too late.
See tables 1 and 2 on the following pages.
(Billions of Dollars)