What is a Fair Wage?

In today's Wichita Eagle opinion section, there was an interesting letter to the editor from someone I assume to be a Boeing worker (for those not local, Wichita's Boeing plant is being sold to a company called Onex that is having trouble negotiating a deal with the union labor force). This opening question is what drew my attention:

"Who determines fair and equitable wages and benefits?"

This is a great question. When someone claims that they pay, or should be paid, a "fair wage" we should instinctively ask, "according to who? Who gets to decide what fair means?" Unfortunately he answers this question with his own question:

"The question should be: What is the value of the labor compared with the cost of the airplane?"

This is the labor theory of value (LTV). It equates the "value" of an exchangeable good or service with the labor that goes into producing it. LTV has a long and illustrious pedigree of thinkers who developed it: John Locke, David Ricardo, and Karl Marx to name a few. Adam Smith wrote about the difference between the "nominal value" of what a good is exchanged at on a market as opposed to its "real value" -- the amount of labor that went into producing it. This idea that price is determined by production costs, combined with John Locke's idea that we own something by mixing our labor with it, gets fully developed into a theory of the exploitation of workers by Karl Marx.  And that is what is embodied in the next sentence of the paragraph:

"You have to admit that a Boeing sells for more than a Cessna, Beech, or Learjet."

So the argument goes something like this: what a plane sells for on the market is determined by its production costs, the majority of which is determined by human labor.  Boeing 777's sell for a lot more than little Cessna's.  Therefore, anything less than a lot of money flowing to labor is exploitive and unfair.

This is why mental models are so important. Ideas matter: if LTV is your vision of how the world works, then this argument makes sense. Unfortunately, its adoption has led to some of the greatest human suffering in the history of mankind. There is another point of view, however.  Do you know what it is?  In my next post I'll present it.  But until then, give it some thought -- talk about it with others.