Saturday, August 14, 2010

Positive Responses to Our Economic Future (Part One)

So I received some really good responses to my previous blog post. Ok, I make it sound like a lot, but I really did have one really good exchange with a friend. It was so good that I decided to repost the exchange in full.

His comments:

I definitely agree with a lot of what you are saying. I whole heartedly think that housing prices were artificially high for so long, that it may seem like a bad thing that they are going down...but its a neccessity. Its pretty much market correction.

As far as interest rates..they do need to rise temporarily I think they need to rise because eventually countries with money are going to want to stop investing in our bonds.

Now, I will argue that a lot of that "free-market" economic and Milton Friedman stuff is was got us into the mess we are in now.
And this statement here:

.......I didn't plan to go into detail, but in free-market economies prices go down, wages go up, and standards of living go up. This is contrary to what other schools of economic thought believe. Don't believe the myth that says that "capitalism necessarily requires permanently low-wages to be successful." It is a lie and anti-capitalist propaganda.....

I don't know if I would completely agree with this because in a truly non regulated capitalistic society there is a huge incentive for employers to pay workers less in order to get the most out of profits. If you really look back in history to societies where TRUE free market policies occurred, there was always a crucial economic divide b/w rich and poor. Now I ask you, do you think that if the governement in this country did not enforce a minnimum wage or child labor protections that companies would actually pay people a living wage or not hire little kids at a cheap wage. Before you answer the question about hiring children, look at how the US labor force was before child labor laws were put into effect.

Anyhow, I am definitely glad to see you reading and forming a good opinion on this stuff, if more people had an understanding of the economy and could form opinions the way you do, we might not be in the mess we are in now.

My Response:
Thanks for responding.

I'm glad you mentioned Milton Friedman because now I have a chance to clarify a point: Milton Friedman started the Monetarist School of Economics, a school that the Austrian School of Economics is very critical of. Friedmanites believe that central banks ought to control the money supply; Austrians believe that central banks shouldn't even exist. So Friedman isn't all "free-market" as people may think he is; and, you are correct in criticizing Friedman. His ideas, in a sense, enabled the actions of the Federal Reserve today. (I mistakenly posted a video of one of Friedman's speeches a few months back, but that was before I found out critical Austrian's are of him. I always knew there was a difference between monetarism and austrian economics, but I didn't know how harmful his ideas were later)

As for your minimum and living wage concerns, I have been asked this question before, and I hope I don't miss your question entirely. But before I attempt to answer I must call to mind what a wage is: an agreed upon price for your labor. When you accept a job's wage, you are essentially saying "the value of my labor is X." If you didn't believe the value of your labor was X, then you would negotiate for a higher wage.

This "price"--in practice--is no different than the price of goods on a shelf. Let me explain:

Just like consumers want the most bang for their bucks, so do employers. A consumer is entitled to savings when he chooses one brand over another, and the employer is entitled to savings when he chooses to hire one person over another. For example, if a person chooses Tide over Clorox (assuming Tide costs less), he or she is saying three things: the prefer Tide (which is obvious), they prefer to save, and that it is a detergent that gets the job done.

But what happens when you implement a price control on all detergents, and all detergents are now $5 - every brand. How does the consumer choose what he wants? He can go by looks, reputation, the ability to get the cleaning job done; the one thing he can't factor in is savings, which often goes into most people's calculations. In effect, Tide has lost all of its bargaining chips to the consumer. Why? Because people will choose a brand for reasons other than savings.

Why is all of this relevant? Because the minimum wage is essentially a price control. It is saying no matter how good, or bad, a person can do the job all the costs of labor is worth the same. Historically, the minimum wage has had the worst effects on black people, and originally it was meant to do so. When white labor unions were concerned about poor low-skilled whites being put out of work by poor low-skilled blacks, the first thing they wanted was a minimum wage. The reason was because blacks were using their bargaining chips and taking jobs for cents less than whites, just to have a job. But once the minimum wage was implemented employers could no longer factor in savings to hire workers. They had to choose something else. In that time, the color of a man's skin could be the difference in hiring someone. But if there wasn't a minimum wage, blacks could bargain for a job.
(This also goes to show that even if an employer is racist, it isn't always in his best interest to practice his racism if he prefers saving and making money.)

On another note, price controls like the minimum wage also have another unintended effect: labor shortages. In other words, unemployment rises as the price of labor goes up. Labor shortages because of price controls work the same way we have food shortages, gas shortages, or other shortages when price controls are implemented. It was before my time, but I think it was in the 1970's or 1980's when the gas prices were skyrocketing and the government's reaction was to implement price controls on gas. The rise in prices was the market's way of saying that supply is short and demand is high, therefore the price is going up. But once they put a cap on prices, gas companies had incentive not to supply gas, because there were no profits.

In the same way, when you implement a price control on labor, employers have less incentive to hire, because it cuts into profits.

Finally, now, I think that while employers were free to not provide a minimum wage (a reasonable wage is probably the better term) at one point, it wasn't always in their best interests to do so. Too many workers strikes cuts into business activity. At the same time though, we have to factor in what they can afford, and that a price control is still a price control. During the industrial revolution when children received low pay for long hours and hard labor, we have to take into account that often these were kids in poverty, many facing starvation. If they didn't have that job, they wouldn't be eating. When you implement a minimum wage, their employers have less incentive to hire more workers. In a situation like that, I think, the principle would still be the same: higher minimum wages leads to higher unemployment. You would then have kids eating to not really eating at all.

While this may seem cruel, the money being saved from profits is being exchanged for goods and services in other industries (where real people also work). So the benefit of an employer keeping profits is not immediately seen, but nonetheless exists.

...I don't think eliminating the minimum wage necessarily means that employers will begin to provide terrible wages. Some wages will in some industries get lower, but then you have some wages getting higher; but that would just be the market setting the prices of wages like it sets the price of everything else.

A while back one of my friends pointed out to me that while minimum wage may actually help secure a certain amount of income, it may also create incentive for employers to pay them "only" a minimum wage, even if the price of labor is much higher. In other words, the minimum wage can have another unintended effect: people are duped into thinking their labor is worth less than what it really is. Now, how true my friends observations are is uncertain, but it definitely seems reasonable.

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