In a recent post, I was concerned with American sentiment weakening on the idea of the American dream. My main view is that this is the effect of the economic struggle American middle-class is going through. American middle class is struggling because worker productivity growth was disproportional to wage growth. In other words, what happened was that American workers got ripped off. But the question is how did they get ripped off?
American Dream origin: a motivation tool
When I read Adam Smith’s major work “The Wealth of Nations”, I was struck by his view about slavery and the reason why it was a bad idea. According to the father of classical economics, slavery is bad because it incites slaves to produce for as little as possible since their compensation will never go higher than the modest food, clothes and shelter that are given to them to keep them alive. This is an excerpt from book 3 chapter 2:
But if great improvements are seldom to be expected from great proprietors, they are least of all to be expected when they employ slaves for their workmen. The experience of all ages and nations, I believe, demonstrates that the work done by slaves, though it appears to cost only their maintenance, is in the end the dearest of any. A person who can acquire no property, can have no other interest but to eat as much, and to labor as little as possible. Whatever work he does beyond what is sufficient to purchase his own maintenance can be squeezed out of him by violence only, and not by any interest of his own.
According to Smith, the main benefit behind capitalism as a economic system is to encourage all to be more productive by giving the right to own stuff. This is precisely where the American Dream comes from: the idea that by working hard enough, we can one day be proprietors and not have to work anymore!
But here lies a dilemma.
The American Dream is incompatible with capitalism
What happens when all workers are proprietors? One thing is sure and it is that Adam Smith didn’t really like the idea. Let’s take a look at book 1 chapter 8:
What are the common wages of labor, depends everywhere upon the contract usually made between those two parties, whose interests are by no means the same. The workmen desire to get as much, the masters to give as little as possible. The former are disposed to combine in order to raise, the latter in order to lower the wages of labor.
It is not, however, difficult to foresee which of the two parties must, upon all ordinary occasions, have the advantage in the dispute, and force the other into a compliance with their terms. The masters, being fewer in number, can combine much more easily; and the law, besides, authorizes, or at least does not prohibit their combination, while it prohibits those of the workmen. We have no acts of parliament against combining to lower the price of work; but many against combining to raise it. In all such disputes the masters can hold out much longer. A landlord, a farmer, a master manufacturer, a merchant, though they did not employ a single workman, could generally live a year or two upon the stocks which they have already acquired. Many workmen could not subsist a week, few could subsist a month, and scarce any a year without employment. In the long run the workman may be as necessary to his master as his master is to him; but the necessity is not so immediate.
A man must always live by his work, and his wages must at least be sufficient to maintain him. They must even upon most occasions be somewhat more; otherwise it would be impossible for him to bring up a family, and the race of such workmen could not last beyond the first generation.
When workers accumulate capital, their immediate need for money is lowered. As a result, they have a stronger position when negotiating for wages. This is precisely where the dilemma lies: from one hand, employers need to motivate workers by giving them a share of what they produce but on the other hand, they need to take that away from them so that workers will agree working for less.
What kills the American Dream
Earlier in this post, I talked about the disproportional growth of wages with productivity. Well, this is precisely in accordance with Smith’s view that workers should be deprived of their wealth so they would agree to work for less. When employers do not compensate workers for improvements in productivity, they are depriving them from achieving the American Dream. When speculators create bubbles on the stock market, they are taking people’s saving from them and thus killing their American Dream.
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Dude, where is your American dream?
My heart broke when I read about American public opinion shifting towards pessimism when i comes to getting rich. Seven Americans out of ten believe it is harder to get rich. Compared to 1999, there are eight times more people that have lost faith in the American dream.
One thing is sure: American aren’t trying their best to have better financial situation. If you doubt this, take a quick look at the best selling books on Amazon.com. Most of them are going to be either about self help, personal finance, investment, entrepreneurship and career or business management. In other words, if there is anything on American mind, it is money for sure.
So how come, despite all their effort, Americans just came to the conclusion that the American dream is no attainable? My opinion is that plain economic reality has hit most Americans in the face. By economic reality, I’m not talking about the current recession. What I mean by economic reality is the fact that there just seems to be less money in the hands of average Americans and that they start being aware of it.
Low income plus high debt is killing everybody
When asked about the biggest obstacle to getting rich, more than half believe it due to low income. Of course, the cost of living never diminishes. Again, we can’t really blame Americans for their misfortune by saying that they don’t work hard enough. If you are skeptical about this, take a look at productivity growth vs wage growth for the last 15 years. It is obvious that wages haven’t grown as much as productivity does. In fact, Americans have been penalized for their good productivity by seeing their jobs being shifted aboard for less competitive salaries.
Basically, the only thing we can blame Americans for is to not work for the same wage Chinese or Indians work for. But then, if Americans decided to work for the same low wages as in Asian countries, how many of them would be able to buy new plasma TVs, iPhones, laptops, iPad, etc? The answer is they won’t be able in the long run. Of course, they can always do their spending on credit. But sooner or later, when incomes decrease and that expenses stay steady or increase, something bad is going to happen. And this is exactly what happened with the current economic crisis that started with a credit (mortgage) crisis. With decreasing income, Americans will have to learn frugality which means that they will have to find a way to explain to their kids that they won’t be able to have the next iPad.
My opinion is that American dream is attainable if there is balance between productivity and wage growth. If this issue gets fixed, then people will see an increase in their income, people will rely less on credit and might believe that they will, one day, get rich.