handshake Employees Aren't the Only Source of Value
report_off The claim
"A business owner can only get rich off the productivity of the people he employs."
No. This claim assumes the company is a fixed-size cake, entirely baked by the employees, from which the boss then skims a share.
An employee obviously produces value. But he generally doesn’t produce it alone: he uses capital, tools, premises, software, an organization, a brand, a customer base, and means of production the company supplies. A truck driver can’t sell his time the same way with or without a truck. A mechanic doesn’t work the same way without a garage or a lift. A cashier can’t do the job without a register, a store, inventory, and a computer system.
The capital placed at his disposal therefore increases his productive capacity. And that capital had to be financed, chosen, bought, and maintained by someone, bearing the risk of loss.
Above all, employment is a contract. The employee sells his labor for a set period in exchange for agreed pay. The employer buys that labor because he thinks he can extract more value from it than it costs him. The employee accepts because he prefers that wage to the alternatives available to him.
If employees really were the sole producers of a company’s wealth, a simple question would arise: why do they work inside companies at all? Why don’t they sell their labor directly to their own customers and keep all the value created for themselves?
Some do exactly that: the self-employed, tradespeople, consultants, shopkeepers, entrepreneurs, and so on. And when they succeed enough, they end up hiring other people themselves.
And this is where the argument gets rather ironic: the former employee turned successful entrepreneur suddenly becomes, in some rhetoric, someone whose wealth is suspect and who should be taxed more.
The reality is more interesting: the entrepreneur combines labor, capital, knowledge, organization, and risk-taking to try to meet consumers’ needs. He can win, but he can also lose his capital.
This is precisely Mises’s central insight about the entrepreneur: profit rewards forecasting under uncertainty. The entrepreneur commits resources today for a future outcome he doesn’t actually know.
Of course, a boss can also get rich through a rent, a legal privilege, a protected monopoly, or favorable regulation. But in that case, it is precisely not employee productivity that explains his enrichment.
The real problem with the sentence, then, is the word “only.”
Employees are a source of value creation. They are not the only one.
A company is not a system where employees create €100 and the boss arbitrarily decides how much of it to let them keep. It is a voluntary coordination of factors of production, capital, and labor under uncertainty, in the hope of creating more value for consumers than the resources mobilized cost.
The vessels are still not communicating: the worker can earn more thanks to his employer’s capital, and the employer can get rich because he has succeeded in combining that labor with capital and organization to create more value.
Quotes
View full quote"What distinguishes the successful entrepreneur and promoter from other people is precisely the fact that he does not let himself be guided by what was and is, but arranges his affairs on the ground of his opinion about the future...."
View full quote"Value is the relationship existing between two services that have been exchanged."
Books
Human Action: A Treatise on Economics
Ludwig von Mises' magnum opus and the most comprehensive systematic treatment of economics from the Austrian School perspective. Mises develops pra...
Read MoreEconomic Harmonies
Bastiat's unfinished masterwork, arguing that free markets, left to themselves, produce a harmony of interests rather than the class conflict predi...
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