Atlas Shrugged, part II, chapter VI

At the end of their conference, the villains agree to put Directive 10-289 into effect. When Dagny reads about it in the morning paper, she bursts into Jim’s office, announces that she’s quitting, and storms out:

The newspaper was twisted into a roll by the time she stood before him. She threw it at his face, it struck his cheek and fell down to the carpet. “There’s my resignation, Jim,” she said. “I won’t work as a slave or as a slave-driver.”

Dozens of other industrialists retire and vanish that same day. Strangely, Hank Rearden doesn’t, even though some of his employees do:

The first man to quit at Rearden Steel was Tom Colby, rolling mill foreman, head of the Rearden Steel Workers Union. For ten years, he had heard himself denounced throughout the country, because his was a “company union” and because he had never engaged in a violent conflict with the management. This was true: no conflict had ever been necessary; Rearden paid a higher wage scale than any union scale in the country, for which he demanded — and got — the best labor force to be found anywhere. When Tom Colby told him that he was quitting, Rearden nodded, without comment or questions.

Wait, what? Colby was denounced “throughout the country” for not striking, even though the workers at Rearden’s plant were happy with how they were being treated? By whom? Are there people in Randworld whose job it is to wander the country randomly demanding that unions go on strike?

But rather than focus on Rand’s Christian-fundamentalist-like insistence that everyone who loves capitalism will be persecuted, I want to touch on a different point.

She notes, in a blink-and-you’ll-miss-it moment, that Rearden pays more than any of his competitors, and because of this, he’s able to attract and keep a better workforce. This is one of the rare occasions where Ayn Rand makes a solid, cogent economic point. The evidence does indeed suggest that paying a living wage benefits a company as well as its workers. People earning a good living will be truly invested in their employer’s success and have an incentive to work harder, whereas the alternative is employees who have no loyalty or devotion to their jobs and will jump ship as soon as a better offer comes along.

This principle even holds true in the service industry, which is better known for low-wage, low-skill jobs. Retailers like the Container Store, Trader Joe’s, QuikTrip, and Costco have all prospered by paying their employees well and offering stable jobs and opportunity for advancement. Costco, for example, pays an average hourly wage of $20.89, plus overtime, compared to $12.67 for Wal-Mart. One study of companies like these found that “every additional $1 spent on employee salaries resulted in an increase of anywhere from $4 to $28 in sales.”

But greed is a powerful incentive, and for every company that pays its workers well, there are dozens of short-sighted ones that pay poverty wages, pushing their workforce to the ragged edge of destitution for the sake of favorable stock market performance and sky-high executive compensation. I’ve written about this before: the Wal-Mart that held a canned-food drive for its own workers, or the McDonald’s corporate helpline that instructed employees how to apply for food stamps. These giant, highly profitable corporations pay so little that their workers can’t survive without public assistance, even as they rake in billions of dollars of profit per year. In effect, they’re leeching from the public purse, free-riding off safety-net programs that are intended to help the truly needy – not the gainfully employed!

For all her reputation as a hardbitten capitalist, Ayn Rand was remarkably naive about this sort of thing. She was unshakable in her belief that the free market, if left to itself, would work this out somehow, and that relationships between labor and management would be happy, harmonious, and mutually beneficial – notwithstanding the abundant historical evidence and even contemporary evidence to the contrary.

The real issue is that wages are a tragedy-of-the-commons problem. Under the natural logic of capitalism, every business should want to pay its own workers as little as possible to lower its costs and increase its profitability. Yet every business should also want everyone else‘s workers to be paid well, because those people will have spending money and can be converted into customers. The rational solution to a commons-type problem is regulation, and that’s just what the minimum wage does. By setting a floor on what workers can be paid, it cuts down on the temptation to be selfish and steers everyone into making the choice that’s collectively best.

The usual libertarian/Randian response is that raising the minimum wage makes running a business more expensive and thereby forces owners to cut back on hiring. But the best evidence suggests that this is false and that a higher minimum wage doesn’t increase unemployment. After all, there are countervailing forces at work: it may cost each owner more to run their company, but if workers are paid more, they can also spend more, generating more demand and more economic activity, which benefits all companies. Studies find that states with higher minimum wages have seen no negative impact on job growth, and some have seen a positive impact. The same goes for high-minimum-wage cities like San Francisco and Seattle, which continue to see strong job growth in the recovery from the Great Recession.

In an ideal rational world, company owners would see that there’s no contradiction between well-paid employees and a thriving business, and would act accordingly without any need for coercion. But as I said, in this world, greed and short-sightedness tend to cloud the picture, and make everyone worse off as a result. Countermeasures like minimum-wage laws – not to mention labor organizing – are nothing but a way to steer society toward the same harmonious end state that Ayn Rand herself claimed to want.

Other posts in this series: