The Economics of Illusion by L. Albert Hahn

Author:L. Albert Hahn [L. Albert Hahn]
Language: eng
Format: epub, pdf
ISBN: 978-1-61016-031-5
Publisher: Squier Publishing Co., Inc.,
Published: 1949-03-25T16:00:00+00:00

12. The Purchasing Power Theory—Sense and Nonsense*

When the average businessman thinks about wage problems and a wage policy, as he often must do nowadays, he cannot help being unhappy. On the one hand labor unions and government officials tell him that high wages are essential to maintain demand—and thereby employment—in the American economy; that to avoid or combat depression, wages should go up and/or prices down. On the other hand the businessman—while he is fully aware of the importance of the demand side—knows from experience what rising wages mean for his business. Higher wages do not trouble him much as long as he can be pretty sure that he can raise prices to cover his higher costs. But the average firm—especially the smaller firm—usually compares its wage outlays with existing prices, which it hopes will not recede. It knows that rising wages, unless offset by a rather slow process of improved productivity, can force it out of business.

In this confusing situation, what shall the businessman believe? Shall he follow the so-called purchasing power theory, in which wages are alleged to be the dominant means of maintaining demand? Or shall he rely on his own experience, which has taught him that production can be undertaken only if and when costs do not outrun prices?

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