3 min read

 Tim McIver lives in South Portland.

The Aug. 14 letter “Capitalism only works when prosperity is shared” raises an important question: Why haven’t the wages of ordinary workers kept pace with productivity as closely as they did in the decades following World War II? The letter did not really answer the question, so here is my attempt at one.

What is productivity? It’s a measure of output produced for a given amount of inputs. One would expect productivity to increase over time as technological advances allow us to do more with less.

Consider farming. In 1948, the corn yield was about 43 bushels per acre; in 2017, that same acre produced 168 bushels. An even more striking statistic is this: in 1948 agriculture accounted for about 13% of employment; by 2017 it had fallen to about 2%. That’s an incredible, two-pronged increase in productivity.

But should the farmer’s wages have tracked that productivity increase? If so, why? Let’s stick with a farming example. If a laborer can create $20/hour of output with a shovel and is then given a tractor that allows them to create $200/hour of output, should the laborer get that extra $180/hour?

What about the business owner that purchased it, the tractor manufacturer that built it, the bank that lent the money, the software developers that wrote the tractor’s software? The answer is that all of them get a cut of that increased productivity. There is no economic law that says that wages should track productivity. Wages are the price of labor and, like all prices, are determined by supply and demand.

But the letter is not really about the divergence of productivity and wages. The author says “People are working harder than ever yet struggling to afford housing, groceries and basic stability.” This is certainly true and it’s what we’re all concerned about these days. But before we conclude that capitalism isn’t working, let’s consider some other factors.

The government’s response to the pandemic was enormous. It included: $2.2 trillion from the CARES Act, March 27, 2020; $484 billion from the Paycheck Protection Program, April 24, 2020; another $900 billion on Dec. 27, 2020; $1.9 trillion from the American Rescue Plan Act, March 11, 2021. And that’s not even all of it.

But it turns out that you can’t inject over $5.5 trillion into the economy and not expect inflation. But inflation by itself is not what hurts. If wages rose just as quickly as prices, our purchasing power would remain the same. But that’s not what happened. Wages have not kept up and now our purchasing power is greatly reduced. This is one of the main reasons why we struggle to afford groceries.

I agree with the author about one thing: Americans should have a genuine opportunity to build a better life through their own work.

Where I differ is in believing that we get there by trying to divide up prosperity after it has been created. The more hopeful path is to make it easier for people to create it in the first place — to start businesses, learn skills, find better jobs, invest, innovate and compete.

America has repeatedly demonstrated what can happen when ordinary people are given the freedom and opportunity to do those things. We should be looking for ways to restore that opportunity, not lose faith in the system that has made such extraordinary prosperity possible.