Labor and Wages: Recent Episodes
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Yellow Trucking Company has filed for bankruptcy and ceases to exist as a viable firm. Much of the blame is due to the Teamsters Union which has a long a violent history.
Original Article: "Yellow Trucking Goes Bankrupt, Thanks in Part to Onerous Labor Laws"
On this episode of Good Money with Tho Bishop, Connor O'Keeffe joins the show to talk about his recent work on the Mises Wire. Tho and Connor discuss the role government incompetency played in the horrific tragedy of the Maui wildfires, as well as the bankruptcy of one of America's largest trucking companies.
Join Bob Murphy, Patrick Newman, Jonathan Newman, and Murray Sabrin in November for a Mises Circle in Ft. Meyers, FL on The White House, the Fed, and the Economy. Use promo code Tampa23 for $10 off registration.
Connor's Article on the Maui Fires: Mises.org/GM20a Connor's Article on Trucking and Labor Laws: Mises.org/GM20b
Good Money listeners can order a special $5 book bundle that includes How To Think About the Economy and What Has Government Done to Our Money? with free shipping using promo code "GoodMoney" at Mises.org/Good
Receive a free subscription to The Austrian magazine at Mises.org/Magazine
Forcing the minimum wage above the real market wage causes more unemployment. Small businesses suffer from these mandates as do the least productive workers.
Original Article: "A Higher Minimum Wage Won't Improve Life in Pennsylvania"
Ryan McMaken joins Bob to discuss the recent US Women's World Cup elimination, and to dispel the myth that markets are discriminatory. After defending Megan Rapinoe's failed penalty kick, they dismantle her outspoken views on "equal pay" in sports, and examine the left's claim that law is required to fix prejudice in the labor market.
Join us in Nashville on September 23rd for a no-holds-barred discussion against the regime: Mises.org/Nashville23
Pennsylvania legislators don't claim to be putting people out of work or killing job opportunities. They claim they just want workers to earn more pay.
Original Article: "Pennsylvania Legislators Want Higher Unemployment, Government Dependency, and Crime"
In this new age of decentralized and democratized content creation, union members' demands may simply be based on wishful thinking for a bygone era.
Original Article: "Striking Hollywood Actors and Writers Might Have to Get Used to Stagnant Wages"
On this episode of Good Money with Tho Bishop, Dr. Jonathan Newman joins to look at recent headlines on inflation. Tho and Jonathan discuss the larger costs of Fed policy on the real economy and how official government measures can be gamed with techniques such as "shrinkflation."
Good Money listeners can order a special $5 book bundle that includes How To Think About the Economy and What Has Government Done to Our Money? with free shipping using promo code "GoodMoney" at Mises.org/Good
Receive a free subscription to The Austrian magazine at Mises.org/Magazine
The latest round of wildfires in Canada has brought out the usual statist demands that we ban fossil fuels, but in the real world fossil fuels protect people from climate-related disasters.
Original Article: "Fossil Fuels Enable Us to Better Fight Fires and Other Environmental Disasters"
The State of California, unable to unionize fast food workers, now is trying to create workers councils that will set labor policies for fast food restaurants.
This will not end well.Original Article: "Leviathan Is on the Menu"
American law protects what is called the "right to strike." However, Leonard Read found no moral code that permits such action.
Original Article: "There Is No Moral Right to Strike"
Austrian economics is not dry theory. It helps us make sense of our world and shows that exchange and production have a place in our moral universe.
Original Article: "How to Teach Austrian Economics to the Neighbor Kids"
Professor Per Bylund joins Bob to debunk the worries over AI and to question whether the latest version of chatbots should even be called "intelligent."
Per on Robots Taking your Jobs: Mises.org/HAP392a
The F.A. Hayek Memorial Lecture, sponsored by Greg and Joy Morin.
Recorded at the 2023 Austrian Economics Research Conference hosted at the Mises Institute in Auburn, Alabama, March 16–18, 2023.
The Austrian Economics Research Conference is the international, interdisciplinary meeting of the Austrian School, bringing together leading scholars doing research in this vibrant and influential intellectual tradition. The conference is hosted by the Mises Institute at its campus in Auburn, Alabama, and is directed by Joseph Salerno, professor of economics at Pace University and academic vice president of the Mises Institute.
With Yale economics professor Yusuke Narita suggesting mass suicide—seppuku—as the answer to Japan's rapidly aging demographics, Jeff and Bob take a hard look at the economics and humanity of greying America.
Richard Hanania, "Gerontocracy Versus Western Civilization": Mises.org/HAP383a
Bob on opting out of Social Security: Mises.org/HAP383b
The imposition of minimum wages harms the economy, although there are nuances in how much harm they cause. It is better not to impose minimum wages at all.
Original Article: "Yes, the Minimum Wage Harms the Economy"
This Audio Mises Wire is generously sponsored by Christopher Condon.
Dr. Peter Klein, professor of entrepreneurship at Baylor University and co-author of the new book Why Managers Matter, joins Jeff and Bob to explain the huge disconnect between supply and demand for labor in post-COVID America.
Dr. Klein's new book Why Managers Matter: Mises.org/HAP378a
Spain's government is attempting to levy a wealth tax ostensibly to be "in solidarity with the poor." Because wealth taxes ultimately help lower real wages, there will be more poor people to share in the "solidarity."
Original Article: "Who Pays Wealth Tax: The Rich or the Poor?"
This Audio Mises Wire is generously sponsored by Christopher Condon.
The modern progressive narratives claim that the wealth of the West and especially of the USA was built upon the backs of slaves. In fact, slavery retarded economic growth.
Original Article: "The West Didn't Become Rich Because of Slavery But in Spite of It"
This Audio Mises Wire is generously sponsored by Christopher Condon. '
Bob and Jeff unravel the corrosive and nonsensical policy of "inflationism," and consider its deep cultural effects.
Read Jeff's talk from the recent Ron Paul Institute conference: Mises.org/HAP360-1
Journalist Jordan Schachtel joins the show to discuss Biden's escalating rhetoric against what he terms "ultra-MAGA" semi-fascists. Is America finally past any pretense of democracy?
Clifton Duncan joins the show to discuss Joe Biden's student loan forgiveness plan, along with the broader question of whether college and student loans are still worthwhile for young people.
Jeff's Article, "Is College Worth It?": Mises.org/HAP358-1
Not satisfied with putting thousands of people out of work with its infamous AB 5 legislation, California lawmakers now are going after fast-food businesses.
Original Article: "AB 257: Another Antieconomic California Boondoggle"
This Audio Mises Wire is generously sponsored by Christopher Condon.
Recorded at Maggiano’s Little Italy in Orlando, Florida, on May 14, 2022.
Special thanks to Greg and Julann Roe for sponsoring this event.
Arguments for equal pay are popular in our body politic, but what happens if some of those arguments are based upon the faulty logic of the labor theory of value?
Original Article: "Are Equal Pay Arguments Based upon the Labor Theory of Value?"
This Audio Mises Wire is generously sponsored by Christopher Condon.
Bob critiques the economic views of Yuval Harari, who predicts “useless people” because of technological advances. Bob then showcases similar thinking from right-wingers. He ends by addressing a common critique of the Christian God.
Mentioned in the Episode and Other Links of Interest: Part 1, Part 2, Part 3, Part 4, and Part 5 of the BMS series on Klaus Schwab and the Great ResetBob’s book with Silas Barta on Understanding BitcoinSource for NWO compilationSource for World Government Summit panel on blockchainSource for Harari audioTim Pool episode featuring Michael Malice discussing NPCs (around 1:04:30)Schwab’s books The Fourth Industrial Revolution and Covid-19 and the Great Reset For more information, see BobMurphyShow.com. The Bob Murphy Show is also available on Apple Podcasts, Google Podcasts, Stitcher, Spotify, and via RSS.
Money printing may bring rising wages, but it also brings rising prices for goods and services. And those increases are outpacing the wage increases.
Original Article: "Real Wages Fall Again as Inflation Surges and the Fed Plays the Blame Game"
This Audio Mises Wire is generously sponsored by Christopher Condon.
Jeff and Bob discuss the dynamics of the housing market in the context of a recent talk by Alex Pollock.
"Hazlitt, Hayek, and How the Fed Made Itself into the World's Biggest Savings and Loan": mises.org/PollockAERC
The United States’s jobs recovery is extremely poor, especially if we consider the size of the monetary and fiscal stimulus and the spectacular upgrade to GDP estimates.
Original Article: "This Is a Weak Jobs Recovery"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
We often hear these minimum wage laws are well intentioned. I cannot agree. Minimum-wage laws are evil in their methods (coercion) and evil in their goals (to make people believe they’re dependent on government).
Original Article: "My Case against Minimum-Wage Laws"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
Henry Hazlitt’s second law is the observation that everything in Keynes's General Theory is either unoriginal or untrue. Keynes's theory of unemployment equilibrium is the most original aspect of his work.
Original Article: "Why Keynes Was Wrong about Unemployment"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
The automation doomers assume that when jobs are eliminated by automation in one place, that the number of jobs are permanently gone. For this to be true, there would have to be no growth in the need for labor elsewhere.
Original Article: "Is Guaranteed Basic Income the Solution to Robots Taking Our Jobs?"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
Our guest is Professor David Heymann, an American physician and epidemiologist based at the London School of Hygiene and Tropical Medicine. He has held leading positions at the WHO for more than 20 years, coordinating global responses to epidemics such as Ebola, AIDS, polio, and SARS. He also served as Chairman of Public Health England from 2009 until 2017. Professor Heymann shares his perspectives on post-pandemic life and on opportunities for the public health sector.
SHOW NOTES David Heymann: Professional page and Wikipedia page
Related Episode: Ep. 140. Gabriela Gomes: Why Herd Immunity May Be At Hand
Related Episode: Ep. 148. Herd Immunity Models and Realities, with David Heymann and Paul Fine
Watch the episode on our YouTube channel
The US has millions of idle workers. In a normal economy this would put a damper on demand. But in our money-printing economy, consumer demand is surging even as production falls behind. An employment bubble is the result.
Original Article: "How Trillions in Newly Printed Money Created a Labor Shortage"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
Gary Wolfram is an economics professor at Hillsdale College, who was both a teacher and colleague of Bob during his two stints at the school (first as a student then as a professor). They discuss Gary’s background as an economist in both academia and the political sphere, and why government intervention hurts the people it ostensibly helps.
Mentioned in the Episode and Other Links of Interest: The YouTube version of this interviewGary Wolfram’s book, A Capitalist ManifestoBob’s article on the $15 minimum wageWalter Williams’ 2007 FEE article on the minimum wageMises’ Liberalism and Bastiat’s The Law For more information, see BobMurphyShow.com. The Bob Murphy Show is also available on Apple Podcasts, Stitcher, Spotify, and via RSS.
Social activists now regard the minimum wage as another welfare program that can reduce the costs of programs like Medicaid and food stamps, and can reduce inequality. But the minimum wage is very poorly targeted for these purposes.
Original Article: "The High Cost of Using the Minimum Wage as a Form of Welfare"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
There are plenty of sound reasons to oppose government minimum wage laws, but there is one objection making the rounds that is based on bad economics and should be avoided, and that’s the "businesses will pass on the costs to consumers" objection.
Original Article: "How Not to Argue against the Minimum Wage"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
It is only through the increase in capital goods, i.e., through the enhancement and the expansion of the infrastructure, that labor can become more productive and earn a higher hourly wage.
Original Article: "Understanding Minimum Wage Mandates: Empirical Studies Aren't Enough"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
Students have been denied in-person schooling. At the same time, millions of women—many of whom have children—have been thrown out of work. Suddenly, homeschooling became a much more viable and necessary option.
Original Article: "Why the Covid Shutdowns of Public Schools Are Driving So Many to Homeschooling"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
Will Trump pardon these two genuine heroes? He might yet surprise me, but I doubt it because we can see from the people he has already pardoned that his values are warped and perverted.
Original Article: "Snowden and Assange: There Is Still Time for Trump to Do the Right Thing"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
Jeff Deist and David Gornoski comment on covid bailouts; Joe Biden’s sky-high promises; the World Economic Forum’s plan to eliminate private property; vaccine passports; and more.
Find more from David Gornoski on A Neighbor's Choice.
Ryan McMaken joins the show to discuss Adam Fergusson's seminal history of Weimar-era hyperinflation in Germany, When Money Dies. Americans accustomed to the dollar's king status have no idea how quickly and brutally a currency can lose value, especially when war finance distorts the entire structure of a nation's economy.
What follows is sobering: hunger, violence, crime, and degradation. This fascinating book makes for a great study of how and why inflation rises quickly, and provides a cautionary tale for central banks and fiscal policy makers today.Plus listen to the show for a link to your free copy of the book!
Read Hans Sennholz on Hyperinflation at Mises.org/HyperInflation
Find Henry Hazlitt's What You Should Know About Inflation at Mises.org/InflationHazlitt
Read Lyn Alden's article on inflation at Mises.org/Alden
It's increasingly clear two things are going on: leftists are very interested in taking their rioting and looting far beyond city limits, and government police are not interested in doing much about it.
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Millian Quinteros.
Original Article: "Self-Defense and 'Taking the Law into Your Own Hands'".
The best social policy is one that supports job creation and rising wages. Entitlements do not make a society more prosperous, and ultimately drive it to stagnation.
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Millian Quinteros.
Original Article: "If the US Adopts Eurozone Policies, the Jobs Recovery Will Suffer".
So far, the United States is leading Europe in employment improvement, but the full recovery is extremely far away.
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Millian Quinteros.
Original Article: "The Global Jobless Recovery"
The highly regulated, protectionist Japanese economy, and an overall collectivist culture, leaves little room for flexibility in executive pay. This makes Japanese businesses less competitive, and work life more miserable.
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Millian Quinteros.
Original Article: "Japan's Executive Pay Gap".
The Human Action podcast with Jeff Deist continues tracking Rothbard's Man, Economy, and State, this time focusing on the role of entrepreneurs in the production process (Chapter 8).
Hunter Hastings joins the show with great insights into the social benefits of profit vs. interest, entrepreneurial risk, progressing and retrogressing economies, and the bunkum known as the "Paradox of Saving." This chapter presents Rothbard's exposition of the individual's (or firm's) role in bringing goods and services to us—while Keynesian and classical economists see capital as a homogenous blog and try to wedge entrepreneurs into mathematical models. You'll also hear why Jeff Bezos is not the devil, why rich kids tend to waste the fortunes created by their parents or grandparents, and why Marx was dead wrong about the little guy.
Read the book free of charge in searchable HTML format here.
Use the code HAPOD for a discount on Man, Economy, and State from our bookstore: Mises.org/BuyMES
Additional Resources Economics for Entrepreneurs Podcast: Mises.org/E4Epod
Dr. Joe Salerno's introduction to Man, Economy, and State: Mises.org/SalernoMES
Man, Economy, and State: Mises.org/MES
When you hear a cop has been fired from his job for some heinous act, be sure to check back a few months later. He may have been rehired thanks to the fact that it's very easy for cops to appeal termination and win.
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Millian Quinteros.
Original Article: "Why Abusive Cops So Often Keep Their Jobs"
Central banks have decided that one of their main missions is to prevent deflation. But this only ends up causing the malinvestments that lead to economic busts.This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Millian Quinteros.
Original Article: "Let's Hope Deflation Is Headed Our Way"
Paul Krugman is now claiming that reopening the economy and allowing people to go to work almost surely will cause a depression.
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Millian Quinteros.
Original Article: "Krugman: We Need More Unemployment—to Save Us from Unemployment"
The COVID-19 panic may have sped up the beginning of this economic crisis, but the virus wasn’t the cause. The real cause of the crisis was the boom that came before it.
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Millian Quinteros.
Original Article: "This Bust Wasn't Caused by a Virus"
Government restrictions on production are driving prices up as unemployment drives them down. It's impossible to say now whether price inflation or price deflation will be the predominant factor in the crisis's next phase.
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Millian Quinteros.
Original Article: "Why the Current Unemployment Is Worse Than the Great Depression "
Jeffrey Rogers Hummel joins Bob Murphy for an in-depth discussion of the economics of slavery, touching on subtleties such as the labor/leisure trade-off, and the recent claims by some historians that slavery was efficient. Bob also asks Hummel to explain the provocative claim in his book, that the Confederacy would have done much better militarily if it had used the same guerrilla warfare tactics that the American colonists had used against the British.
For more information, see BobMurphyShow.com. The Bob Murphy Show is also available on iTunes, Stitcher, Spotify, and via RSS.
When the Americans with Disabilities Act was passed, employers hired fewer disabled workers, because they feared lawsuits. We may now be seeing a similar trend in the face of more sexual harassment claims.
Original Article: "After #MeToo, Men Begin Avoiding Female Co-Workers".
One would get the impression, reading most of the discussions in today's American newspapers and magazines, that no one had ever thought of doing anything for the poor until Franklin Roosevelt's New Deal in the 1930's, or even until President Johnson's "war on poverty" in the 1960's. Yet private charity is as old as mankind; and the history of governmental poor relief, even if we ignore the ancient world, can be traced back more than four centuries.
In England the first poor law was enacted in 1536. In 1547 the city of London levied compulsory taxes for the support of the poor. In 1572, under Elizabeth, a compulsory rate was imposed on a national scale. In 1576 the compulsion was imposed on local authorities to provide raw materials to give work to the unemployed. The Statute of 1601 compelled the Overseers of the Poor in every parish to buy "a convenient stock of flax, hemp, wool, thread, iron and other stuff to set the poor to work."
It was not compassion alone, or perhaps even mainly, that led to these enactments. During the reign of Henry VIII, bands of "sturdy beggars" were robbing and terrorizing the countryside, and it was hoped that the relief or the provision of work would mitigate this evil.
Poor relief, once started, kept growing. According to the early statistician, Gregory King (1648–1712), toward the end of the seventeenth century over one million persons, nearly a fifth of the whole English nation, were in occasional receipt of alms, mostly in the form of public relief paid by the parish. The poor rate was a charge of nearly £800,000 a year on the country and rose to a million in the reign of Anne.
There was seldom any shame felt in receiving outdoor relief, and it was said to be given with a mischievous profusion. Richard Dunning declared that in 1698 the parish dole was often three times as much as a common laborer, having to maintain a wife and three children, could afford to expend upon himself; and that persons once receiving outdoor relief refuse ever to work, and "seldom drink other than the strongest ale-house beer, or eat any bread save what is made of the finest wheat flour." The statement must be received with caution, but such was the nature of the complaint of some rate-payers and employers about the poor law.G. M. Trevelyan, English Social History (David McKay, 1942), p. 278.
Guaranteed Income In 1795 a momentous step was taken that enormously aggravated the whole relief problem. The justices of Berkshire, meeting at Speenhamland, decided that wages below what they considered an absolute minimum should be supplemented by the parish in accordance with the price of bread and the number of dependents a man had. Their decision received parliamentary confirmation the next year. In the succeeding 35 years this system (apparently the first "guaranteed minimum income") brought a train of evils.
The most obvious to the taxpayers was a geometric rise in the cost of relief. In 1785 the total cost of poor law administration was a little less than £2 million; by 1803 it had increased to a little more than £4 million; and by 1817 it had reached almost £8 million. This final figure was about one-sixth of total public expenditure. Some parishes were particularly hard hit. One Buckinghamshire village reported in 1832 that its expenditure on poor relief was eight times what it had been in 1795 and more than the rental of the whole parish had been in that year.Encyclopaedia Britannica, 1965. Article, "Poor Law." Vol. 18, p. 218. One village, Cholesbury, became bankrupt altogether, and others were within measurable distance of it.
But even the public expense was not the worst of the evil. Much greater was the increasing demoralization of labor, culminating in the riots and fires of 1830 and 1831.
It was in the face of this situation that the Whig government decided to intervene. In 1832 a royal commission was appointed to inquire into the whole system. It sat for two years. The report and recommendations it brought in became the basis of the reforms adopted in Parliament by a heavy majority (319 to 20 on the second reading) and embodied in the Poor Law Amendment Act of 1834.
The report was signed by the nine commissioners. The secretary was Edwin Chadwick; one of the commissioners was the eminent economist, Nassau W. Senior. The text of the report itself ran to 362 pages; together with its appendices it came to several bulky volumes. It was widely regarded as a "masterly example of a thorough, comprehensive, and unbiased inquiry." As late as 1906, one British writer, W. A. Bailward, described it as a "Blue-book which, as a study of social conditions, has become a classic."J. St. Loe Strachey (ed.), The Manufacture of Paupers (London: John Murray, 1907), p. 108.
Repeating Ancient Errors But today the report is just as if it had never existed. Schemes are being proposed on all sides, which their sponsors assume to be brilliantly original, but which would restore the very relief and income-guarantee systems that failed so miserably in the late eighteenth and early nineteenth centuries, and which the report of 1834 so devastatingly analyzed.
The Speenhamland plan, and schemes like it, endeavored to insure that people were paid, not in accordance with the going rate of wages, or the market value of their services, but in accordance with their "needs," based on the size of their families. A married man was paid more than a single man, and paid still more on a scale upward in accordance with the number of his children. The government — i.e., the taxpayers — paid the difference between his market rate of wages and this scale of minimums.
One effect, of course, was to depress the market rate of wages, because the employer found he could reduce the wages he offered and let the taxpayers make up the deficiency. It made no difference to the worker himself who paid him how much of the fixed total that he got. Another effect was to demoralize the efficiency of labor, because a man was paid in accordance with the size of his family and not in accordance with the worth of his efforts. The average unskilled laborer had nothing to gain by improving his efforts and efficiency, and nothing to lose by relaxing them.
Conditions in 1834 But let us turn to the text of the Commission's report, and let the following excerpts speak for themselves. They are taken almost at random:
The laborer under the existing system need not bestir himself to seek work; he need not study to please his master; he need not put any restraint upon his temper; he need not ask relief as a favor. He has all a slave's security for subsistence, without his liability to punishment. As a single man, indeed, his income does not exceed a bare subsistence; but he has only to marry, and it increases. Even then it is unequal to the support of a family; but it rises on the birth of each child. If his family is numerous, the parish becomes his principal paymaster; but small as the usual allowance of 2s. a head may be, yet when there are more than three children, it generally exceeds the average wages given in a pauperized district. A man with a wife and six children, entitled, according to the scale, to have his wages made up to 16s. a week, in a parish where the wages paid by individuals do not exceed 10s. or 12s., is almost an irresponsible being. All the other classes of society are exposed to the vicissitudes of hope and fear; he alone has nothing to lose or to gain. ...
The answer given by the magistrates, when a man's conduct is urged by the overseer against his relief, is: "We cannot help that; his wife and family are not to suffer because the man has done wrong." ...
Too frequently petty thieving, drunkenness, or impertinence to a master, throw able-bodied laborers, perhaps with large families, on the parish funds, when relief is demanded as a right, and if refused, enforced by a magistrate's order, without reference to the cause which produced his distress, viz., his own misconduct, which remains as a barrier to his obtaining any fresh situation, and leaves him a dead weight upon the honesty and industry of his parish. ...
It appears to the pauper that the government has undertaken to repeal, in his favor, the ordinary laws of nature; to enact that the children shall not suffer from the misconduct of their parents — the wife for that of the husband, or the husband for that of the wife: that no one shall lose the means of comfortable subsistence, whatever be his indolence, prodigality, or vice: in short, that the penalty which, after all, must be paid by some one for idleness and improvidence, is to fall, not on the guilty person or on his family, but on the proprietors of the lands and houses encumbered by his settlement. ...
"In the rape of Hastings," says Mr. Majendie, "the assistant overseers are reluctant to make complaints for neglect of work, lest they should become marked men and their lives rendered uncomfortable or even unsafe. Farmers permit their laborers to receive relief, founded on a calculation of a rate of wages lower than that actually paid: they are unwilling to put themselves in collision with the laborers, and will not give an account of earnings, or if they do, beg that their names not be mentioned. ... Farmers are afraid to express their opinions against a pauper who applies for relief, for fear their premises should be set fire to. ...
"In Brede, the rates continue at an enormous amount. The overseer says much of the relief is altogether unnecessary; but he is convinced that if an abatement was attempted, his life would not be safe." ... "I found in Cambridgeshire," says Mr. Power, "that the apprehension of this dreadful and easily perpetrated mischief [fire] has very generally affected the minds of the rural parish officers of this country, making the power of the paupers over the funds provided for their relief almost absolute, as regards any discretion on the part of the overseer." ...
"Mr. Thorn, assistant overseer of the parish of Saint Giles, Cripplegate, London, says —
"The outdoor relief [i.e., relief given outside of a poorhouse] in the city of London would require almost one man to look after every half dozen of able-bodied men, and then he would only succeed imperfectly in preventing fraud. They cheat us on all hands. ...
"By far the greater proportion of our new paupers are persons brought upon the parish by habits of intemperance. ... After relief has been received at our board, a great portion of them proceed with the money to the palaces of gin-shops, which abound in the neighborhood. However diligent an assistant overseer, or an officer for inquiry, may be, there are numerous cases which will baffle his utmost diligence and sagacity. ...
"It is the study of bad paupers to deceive you all they can, and as they study their own cases more than any inquirer can study each of the whole mass of different cases which he has to inquire into, they are sure to be successful in a great many instances. The only protection for the parish is to make the parish the hardest taskmaster and the worst paymaster than can be applied to.'"
To economize space, my remaining quotations from the Commissioners' criticisms of the conditions they found must be few and brief.
In many parishes, "the pressure of the poor-rate [i.e., taxes on property] has reduced the rent to half, or to less than half, of what it would have been if the land had been situated in an unpauperized district, and some in which it has been impossible for the owner to find a tenant. ..."
Says Mr. Cowell: "The acquaintance I had with the practical operation of the Poor Laws led me to suppose that the pressure of the sum annually raised upon the ratepayers, and its progressive increase, constituted the main inconvenience of the Poor Law system. The experience of a few weeks served to convince me that this evil, however great, sinks into insignificance when compared with the dreadful effects which the system produces on the morals and happiness of the lower orders." ...
The relief system was found to encourage "bastardy.'' "To the woman, a single illegitimate child is seldom any expense, and two or three are a source of positive profit. ... The money she receives is more than sufficient to repay her for the loss her misconduct has occasioned her, and it really becomes a source of emolument. ...
The sum allowed to the mother of a bastard is generally greater than that given to the mother of a legitimate child; indeed the whole treatment of the former is a direct encouragement to vice. ...
Witness mentioned a case within his own personal cognizance, of a young woman of four-and-twenty, with four bastard children; she is receiving 1s. 6d. weekly for each of them. She told him herself, that if she had one more she should be very comfortable. Witness added, "They don't in reality keep the children; they let them run wild, and enjoy themselves with the money."
Much Like Today Given a modernization of phraseology and an appropriate change in the monetary amounts mentioned, this description of relief conditions and consequences in the early years of the nineteenth century could easily pass as a description of such conditions in, say, New York City in 1971.
What, then, in the face of these results of the prior Poor Law, were the recommendations of the commission? It desired to assure "that no one need perish from want"; but at the same time it suggested imposing conditions to prevent the abuse of this assurance.
It may be assumed, that in the administration of relief, the public is warranted in imposing such conditions on the individual relieved as are conducive to the benefit either of the individual himself, or of the country at large, at whose expense he is to be relieved.
The first and most essential of all conditions ... is that his situation on the whole shall not be made really or apparently so eligible [i.e., attractive] as the situation of the independent laborer of the lowest class. Throughout the evidence it is shown, that in proportion as the condition of any pauper class is elevated above the condition of independent laborers, the condition of the independent class is depressed; their industry is impaired, their employment becomes unsteady, and its remuneration in wages is diminished. Such persons, therefore, are under the strongest inducements to quit the less eligible class of laborers and enter the more eligible class of paupers. ... Every penny bestowed, that tends to render the condition of the pauper more eligible than that of the independent laborer, is a bounty on indolence and vice. ...
We do not believe that a country in which ... every man, whatever his conduct or his character [is] ensured a comfortable subsistence, can retain its prosperity, or even its civilization.
The main principle of a good Poor-Law administration [is] the restoration of the pauper to a position below that of the independent laborer.
The report then followed with its detailed recommendations, which involve many administrative complexities.
The Workhouse System In 1841, seven years after the enactment of the new Poor Law, when a whole series of amendments were being proposed to it by various members of Parliament, Nassau Senior, in an anonymous pamphlet signed merely "A Guardian," came to the defense of the original act, and explained its rationale perhaps in some ways better than did the original report.
"In the first place," he wrote, "it was necessary to get rid of the allowance system — the system under which relief and wages were blended into one sum, the laborer was left without motive to industry, frugality, or good conduct, and the employer was forced, by the competition of those around him, to reduce the wages which came exclusively from his own pocket, and increase the allowance to which his neighbors contributed.
Supposing this deep and widely extended evil to be extirpated, and the poorer classes to be divided into two marked portions — independent laborers supported by wages and paupers supported by relief — there appeared to be only three modes by which the situation of the pauper could be rendered the less attractive.
First, by giving to the pauper an inferior supply of the necessaries of life, by giving him worse food, worse clothing, and worse lodging than he could have obtained from the average wages of his labor. ...
A second mode is to require from the applicant for relief, toil more severe or more irksome than that endured by the independent laborer. ...
The third mode is, to a certain degree, a combination of the two others, avoiding their defects. It is to require the man who demands to be supported by the industry and frugality of others to enter an abode provided for him by the public, where all the necessaries of life are amply provided, but excitement and mere amusement are excluded — an abode where he is better lodged, better clothed, and more healthily fed than he would be in his own cottage, but is deprived of beer, tobacco, and spirits — is forced to submit to habits of order and cleanliness — is separated from his usual associates and his usual pastimes, and is subject to labor, monotonous and uninteresting. This is the workhouse system."
The Royal Commission, in defending that system, had argued that even if "relief in a well-regulated workhouse" might be,
in some rare cases, a hardship, it appears from the evidence that it is a hardship to which the good of society requires the applicant to submit. The express or implied ground of his application is, that he is in danger of perishing from want. Requesting to be rescued from that danger out of the property of others, he must accept assistance on the terms, whatever they may be, which the common welfare requires. The bane of all pauper legislation has been the legislation for extreme cases. Every exception, every violation of the general rule to meet a real case of unusual hardship, lets in a whole class of fraudulent cases, by which that rule must in time be destroyed. Where cases of real hardship occur, the remedy must be applied by individual charity, a virtue for which no system of compulsory relief can be or ought to be a substitute.
Destroying the Beneficiary To later generations the reforms introduced by the Poor Law Amendments of 1834 came to seem needlessly harsh and even heartless. But the Poor Law Commissioners did courageously try to face up to a two-sided problem that the generation before them had ignored and many of the present generation seem once more to ignore — "the difficult problem'' as Nassau Senior put it, "how to afford to the poorer classes adequate relief without material injury to their diligence or their providence." In his 1841 pamphlet we find him rebuking
the persons who would legislate for extreme cases — who would rather encourage any amount of debauchery, idleness, improvidence, or imposture, than suffer a single applicant to be relieved in a manner which they think harsh. ... [They] would reward the laborer for throwing himself out of work, by giving him food better, and more abundant, than he obtained in independence. ... They are governed by what they call their feelings, and those feelings are all on one side. Their pity for the pauper excludes any for the laborer, or for the rate-payer. They sympathize with idleness and improvidence, not with industry, frugality, and independence. ... It is scarcely necessary to remind the reader of the well-known principle, that if relief be afforded on terms which do not render it less eligible than independent labor, the demand for it will increase, while there is a particle of property left to appease it.
However the Poor Law Reform of 1834 may be considered by many today, it proved sufficiently satisfactory to successive British governments to be retained with only minor changes until the end of the nineteenth century. But there was mounting sentiment against it as the years wore on. Much of this was stirred up by the novels of Charles Dickens and others, with their lurid pictures of conditions in the workhouses. Toward the end of the century the more stringent regulations were gradually relaxed. Ih 1891 supplies of toys and books were permitted in the workhouses. In 1892 tobacco and snuff could be provided. In 1900 a government circular recommended the grant of outdoor relief (i.e., relief outside of the workhouses) for the aged of good character.
A 1905 War on Poverty A new Royal Commission on the Poor Laws was set up in 1905. (One member was Beatrice Webb.) It brought in a report in 1909, but as the report was not unanimous, the Government took no action on it. However, new "social legislation" continued to be enacted. An Old Age Pensions Act was passed in 1908. And in 1909 David Lloyd George, the radical chancellor of the exchequer, anticipating President Lyndon Johnson's "war on poverty" by more than half a century, exclaimed in introducing his new budget: "This is a war budget for raising money to wage implacable warfare against poverty and squalidness."
Finally, the National Insurance Act of 1911, providing sickness and unemployment benefits on a contributory basis to a selected group of industrial workers, marked the birth of the modern Welfare State in England, which reached maturity with the enactment of the Beveridge reforms in 1944.
But the Poor Law Commissioners of 1834, and the Parliament that enacted their recommendations, had frankly recognized and faced a problem that their political successors seem, as I have said, almost systematically to ignore — "the difficult problem," to quote once more the words in which Nassau Senior stated it, "how to afford to the poorer classes adequate relief without material injury to their diligence or their providence."
How to Afford Relief Without Destroying Incentives Is this problem soluble? Or does it present an inescapable dilemma? Can the state undertake to provide adequate relief to everybody who really needs and deserves it without finding itself supporting the idle, the improvident, and the swindlers? And can it frame rigid rules that would adequately protect it against fraud and imposture without as a result denying help to some of those really in need? Can the state, again, provide really "adequate" relief for any extended period even to the originally "deserving" without determining or destroying their incentives to industry, frugality, and self-support? If people can get an adequate living without working, why work? Can the state, finally, provide "adequate" relief to all the unemployed, or, even more, guaranteed incomes for all, without undermining by excessive taxation the incentives of the working population that is forced to provide this support? Can the state, in sum, provide "adequate" relief to all without gravely discouraging and inhibiting the production out of which all relief must come? — without letting loose a runaway inflation? — without going bankrupt?
This apparent dilemma may be surmountable. But no relief system or welfare-state system so far embarked upon has satisfactorily surmounted it; and the problem certainly cannot be solved until the alternatives it presents are candidly recognized and examined.
[Originally appeared in The Freeman (March 1971).]
In this episode, Bob tackles Tucker Carlson's intuitive—yet wrong—claim that Jeff Bezos is unloading his labor costs onto the taxpayer. If anything, food stamps and other government assistance programs cause Amazon to pay its workers higher wages.
For more information, see BobMurphyShow.com. The Bob Murphy Show is also available on iTunes, Stitcher, Spotify, and via RSS.
The special legal status of unions is what harms workers. Not the so-called "scabs." Narrated by George Pickering.
Original article: "Scabs" Are the True Labor Day Heroes.
Quarterly Journal of Austrian Economics 20, no. 2 (Summer 2017)ABSTRACT: The article responds to the main points raised by Howden (2016) in his comment on Machaj (2015). Most of them appear not to argue against the model developed in my paper, but argue in favor of most likely scenarios to happen in empirical reality and therefore most probable events to be depicted in the model.
KEYWORDS: capital theory, interest, production structure, labor intensityJEL CLASSIFICATION: B13, B53, D24, E43
A few upscale restaurants in the United States recently have ended the practice of tipping their wait staff, preferring a fixed labor cost method of compensation. This attempt to change this long-standing cultural practice presents a fascinating opportunity to explore a variety of economic concepts including principal-agent problems, gains-from-trade, price discrimination, and cultural institutions designed to build trust.
Professor Gill argues that tipping remains an economically efficient means of providing quality service wherein restaurant owners, wait staff, and customers all benefit in a win-win-win situation. Furthermore, the norm of tipping also provides an excellent example to teach basic economic principles and foster classroom discussion.
Presented at the Mises Institute on 22 June 2017. Includes a Question-and-Answer period.
In this article, I shall consider the nature and consequences of labor-union activities. There are various useful services that unions perform, but my interest will be solely with the social effects of privately exercised coercive power as a means to secure some of their main objectives (e.g., an increase in the remuneration of a particular group of workers).
Forms of Coercive Activities This power is, in a broad sense, exercised in a twofold manner. First, is via physical violence and sabotage. We find personal intimidation of and assault on competitors, nonstrikers, strikebreakers, and managements; sabotage is inflicted even on nonunion competing firms. That unions can do so with impunity is due to their de facto exemption from society's normal sanctions against the private use of physical violence and sabotage.There is a large literature dealing with coercion of this type. Sylvester Petro's contributions are most important. E.P. Schmidt's Union Power (Los Angeles: Nash, 1973), especially chapter 9, is another outstanding analysis and exposure of the situation as it still exists today. Second, and even more important, unions employ a form of coercion that is less commonly regarded as illegitimate, namely, "peaceful coercion" via threats to disrupt the community's process of economic cooperation through a strike or a strike-threat.
Strike-threat power is the source of the authority unions have won in order to discipline their own willing or unwilling members. It has been used to impair the normal production and exchange rights of nonunion workers, and of course it has been used in attempts to exploit investors.Yet investors have taken the risk of providing labor's tools—the assets that multiply the yield to human effort. Moreover, investors continuously finance replacement of materials and work in progress. At times it has even been used detrimentally and ruthlessly against third parties—nonparties to union disputes—who have, in many countries, been denied the right to sue for damages. That is, union power is used not solely against those whose assets or labor are excluded from particular production operations, but against consumers and producers in the community as a whole. Third parties are adversely affected even in the absence of union actions explicitly aimed at them. The disruption of one set of activities throws into disorder the work and lives of others—sometimes a huge number of others.The New York transit strike of 1966 is an apt example. The British coal strike of 1926 was almost as disastrous for the uninvolved community as the general strike of that year.
Due to the fact that the strike is a form of warfare that, when resorted to, requires a strategy and maintenance of morale, it becomes essential during nonstriking, peaceful times to keep alive the war spirit: mistrust and hostility toward the enemy—"the employer."
The threat to strike—"the gun under the table" as Mises called it—like all forms of warfare, can be used for good or noble purposes. Nevertheless, even when the objective is defensible, we are forced to regard all private use of coercive power (whether by boycott or strike) as an intolerable infringement of human freedom. We should condemn the Mafia even if it could be shown that the revenues of racketeering were being used to subsidize opera, cancer research, or civil-rights movements.W.H. Hurt, The Strike-Threat System (New Rochelle, N.Y.: Arlington House, 1973), p. 44. Similarly, the strike is a form of private warfare. Victory is, as in all warfare, to the strong, not necessarily to the righteous. Yet during the present century, apologists for the unions have adopted "might is right!" as a moral principle.
A Fundamental Market Principle A principle derived from the classical general theory of value that, I suggest, should be treated by all economists as a fundamental law is as follows: in any society, the flow of goods and services demanded by consumers and investors is optimal in magnitude and composition when each entrepreneur pays the owners of resources needed (for use in the production of individual outputs) the minimum required to entice their services from other applications or to retain them in the production of any particular output the entrepreneur is directing. Under this law, no resource would be employed in a use that consumers value less highly than an alternative use to which the resource could be put. This "law" is, I suggest, universal and subject to no exceptions! The institutions needed to insure that the pricing mechanism shall actually be operated in accordance with this principle are those that define and enforce transferable private property rights. Whether further institutions are needed to assist the process is still a matter of controversy. The antitrust laws of the United States were (under the kindest treatment of the arguments used for their enactment) intended to provide optimal assistance to the process that allocates the utilization of the aggregate stock of assets and the aggregate flow of labor services in conformity with "consumers' sovereignty."
In the sphere of labor, this economic law indicates that the flow of real wages will be maximized, and any degree of unproductive inequality of earning power will be minimized, when every worker desiring employment in any occupation is offered and accepts the minimum essential to secure his employment (i.e., to attract him from leisure or from alternative occupations and then retain his services).
Notwithstanding the compelling logic of this law, the impression certainly survives that, in a free market (i.e., in a strike-free world), workers' remuneration would be forced down to pitiable levels. But we have never been treated to any rigorous support for that claim. There has certainly been a vast flood of contributions dealing with the issue of a "just" determination of the price of labor. But no consideration has been given to the really vital issue, namely, the crucial relationship of every individual labor cost in every particular project to the aggregate real income of society at large.
Investor Self-Defense When investors recognize their potential vulnerability to strike or strike-threat coercion, they will make full allowance for whatever they judge to be the probability that union power will be used in an attempt to seize part of their capital. In assessing the value they can risk in assets to be devoted to any activity, investors will, to some extent, rely on the unions' reluctance to kill the goose that lays the golden egg or to unduly harm the goose's fertility! They will also consider the probabilities that (1) although in a society that tolerates strike-threat coercion, technological progress will be discouraged, it will not come to an end; labor-economizing and capital-saving achievements in noncompeting fields will still be raising the source of demands for most prospective outputs; (2) in spite of the depressive effects of the use of union power, aggregate income will continue to increase through continued thrift (provision for the future that normally takes the form of the net accumulation of assets); and (3) governments will find it expedient to inflate (reduce the value of the money unit), which, when this action is unanticipated, will have a positive production and employment effect in the short run (however disastrous it may be in the long run).
Investors today expect managements to be expert in (as far as possible) avoiding capitulations to strike-threat pressures, but they know they cannot rely on the managers being wholly successful. They simply know that the avoidance of capitulations to union power brings gains, while capitulations to particularly heavy wage demands will produce losses. In every decision to retain, replace, or provide (accumulated) assets in any productive activity, investors must (if, as entrepreneurs, they are forecasting rationally) regard union property seizures as prospective costs that reduce profitable investment in that activity. From society's angle, then, the consequences of union power so used will be that the composition of the community's assets stock will be adversely affected. In general, the most productive and wage-multiplying types of assets are the least versatile and therefore the most exploitable. Investors will, when possible, avoid such investments until, and if, through wise policy, exploitation by unions becomes less profitable.Investment in that form must certainly decline relatively to investment in nonunionized activities or in more versatile—less specialized—resources. Until that happens, the damage to the material well-being of labor as a whole is inevitable but incalculable.
Labor's Inferior Bargaining Power I must now give some attention to the suggestion that unions wield "countervailing power." It is said that unorganized workers have "inferior bargaining power" in the determination of wage rates unless they can resort to the strike-threat. This influential fallacy was put very lucidly by the famous English judge, Lord Francis Jeffrey, in 1825, very shortly after the repeal of the British Combinations Law.Between 1799 and 1825, laws were aimed at strengthening the ancient common law against restraint of trade. Approximately forty statutes applying to particular trades or industries were enacted against monopolistic pricing and wage-rate fixing. He said:
A single master was at liberty any time to turn off the whole of his workmen at once—100 or 1000 in number—if they would not accept the wages he chose to offer. But it was made an offense for the whole of the workmen to leave the master at once if he refused to give the wages they chose to require.Quoted in Sydney and Beatrice Webb, eds., History of Trade Unionism (London: Longmans, 1920), p. 72.
This sounds, of course, like an intolerable injustice, and so it appeared to the illustrious judge. But that word master, like the world employer today, really refers to the residual claimant on the value of what is being produced. In the absence of monopoly or monopsony abuse, and provided there is no government or private restraint on the loss-avoidance, profit-seeking incentives, it will be to the investors' advantage that managers shall attract or retain all workers the value of whose inputs permits a marginal prospective yield above, or not less than, their predicted marginal-output values. But, if there is no monopolistic or monopsonistic abuse, a corporation will have no power to influence the wage rates that will be to its advantage to offer. Of course, the management's purely interpretive discretion in judging what wage rates to offer may well be wrong, in either direction.
If monopolistic or monopsonistic power exists, it is very easy to raise the value of inputs and/or outputs by excluding competing resources—labor or capital—from an occupation, industry, or area. But it is very difficult indeed to exploit complementary or noncompeting factors, such as capital by labor, or labor by capital.
We have already seen how the flow of capital into nonversatile or otherwise exploitable assets can be reduced when investors are served by vigilant managements and attempts are made to exploit them. For similar reasons, labor is unexploitable, unless managements can somehow suppress competing demands for the workers they acquire. The circumstances required for monopsonistic action to reduce wage rates are those that cause labor to be shut into a firm, occupation, industry, or area. This has occurred and may again occur. The most obvious example concerns what is known as the "lock-in contract," under which an employee who leaves a corporation is subject to some penalty, such as loss of pension rights. But if abuses of this kind are indeed important, they are easily remedied. Lock-in contracts can be declared void and illegal except when they are a protection for investments in human capital (resembling patents to protect investments in research) or unless the contract is a means of repayment of beneficial loans to the employees, such as for moving expenses, and so forth.
Nevertheless, in theory, the monopsonistic exploitation of labor is conceivable. This is not a matter of controversy. The most likely form in which such exploitation of labor might happen (other than through lock-in contracts) is where, by subtle fraud, workers are inveigled into specialized training for an occupation in which they find themselves trapped. I know of no concrete illustration of such a situation. But if it should occur, it would still not justify the private use of force as countervailing power.
Fortunately, there is one simple test for determining whether strike-threat power has countervailed an exploitation that has forced or maintained the price of labor below its free-market value.That is, below the wage rates that would be determined in the light of wage rates in alternative employments open to the workers concerned. The test is whether any workers not presently employed in firms paying the increased wage rates would be prepared to accept work of the same quality and quantity for lower wage rates. But after more than half a century of interest in this subject, I have discovered no case studies in which proof of previous monopsonistic exploitation has been demonstrated in this way.
Unions and Freedom The most important freedom that is denied through union power is, indeed, that of the right of all individuals to accept any employment that they believe will improve their earnings and prospects. The "closed shop" or the "union shop"—devices that have been inflicted on managements in so many parts of the world—must appear to any detached student not only as flagrantly regressive but as an intolerable negation of individual freedom. Yet even under what are called "right-to-work laws," union power can force managements to deny the right of those persons who wish to raise their contributions to the common pool of income from doing so. Juveniles and the less fortunate adults (especially those who are initially less well qualified or those who belong to what Demsetz has called "nonpreferred groups," (such as blacks, nonwhites, Jews, ugly women, and elderly women) can be prevented by various subterfuges (such as color bars, demarcation obstacles, apprenticeship barriers, occupational licensing, and—most effective of all—enforcement of "the rate for the job"Sometimes called "equal pay for equal work," "the standard rate," or "comparable worth.") from improving their earnings and prospects of earnings.
Hence if by "union power" we mean the ability to coerce managements through the threat of organized disruption, the use of that power may enable potential strikers to engross for themselves the effective ability to achieve skills in, or to become "attached" to occupations that would otherwise be open to interlopers. The privileges so gained must be balanced against the detriments suffered by those who are debarred from employment at wage rates that it would have been profitable to offer in a truly free labor market and that prospective recipients believe could raise their earnings and prospects.
Unionists often claim that individuals' freedom is infringed because in any firm in which they work, they have no voice in the making of the rules to which they are subject or in the administration of those rules. Elliott J. Berg attributes to such well-known "labor economists" as J. Dunlop, Clark Kerr, F. Harbison, and C. Myers the view that workers "live in a state of perennial protest arising from the frustrations implicit in being governed by a web of rules they usually have little to do with making."E.W. Bakke et al., Unions, Management, and the Public, 3rd ed. (New York: Harcourt, Brace & World, 1967), p. 19. There is no legal or other barrier to the workers' volunteering to bear most of the risks, by accepting the residual share, if they so wish. They will then automatically have the right to make and administer all the rules under which they work, appoint all the managers, hire all the assets, and borrow all the circulating capital required. In that case, their earnings will be wages plus profits or minus losses, just as the investors' earnings are interest plus profits or minus losses. But the workers will then sacrifice the security of earnings and employment continuity for which the simple wage contract provides. It will, of course, also entail an inappropriate division of function so the majority of investors can spread their risks over many ventures, while workers who put their future earnings at risk cannot spread risks in that form. A sharing of risk and management is, however, by no means out of the question.Ibid., pp. 80-82. But what is really important is that the rules and their administration by the managers would then be unlikely to differ one iota from what they are with investors in the conventional sense accepting the residue.
The Employer Unfortunately, the word employer suggests subordination to the "owners." But the suppliers of the assets and circulating capital are just as subordinate as the workers to the power of "consumer sovereignty." Consumers are the true "employers." A firm's assets are employed just as are the workers. The services of both are embodied in output. Investors willingly submit to the ruthlessness of market discipline. Seen from this angle, investors' acceptance of the residual share from the sale of output provides the most important form of social security for the workers that society offers. Stressing this truth does not of course imply that there is no problem of justice to individuals in the application of social discipline through managerial authority.
Union power is expressed partly through the promise of votes to or the subsidization of legislators at all levels (federal, state, and municipal) and reliance on lobby power generally. Legislation has indeed conferred upon the unions far-reaching immunities before the law. Second, and more seriously, it has, over the years, provided protection for union members from the competition of the underprivileged. Via minimum wage enactments plus "welfare" handouts, occupational licensing, prolonged unproductive schooling, and so on, private objectives sought through government have displaced social objectives sought through the market.
Union power, whether exercised through government or through the strike-threat, far from redistributing income from the rich to the poor, has had exactly the opposite effect. Yet opinionmakers and the public have been brainwashed into believing that greater distributive justice has been its aim and achievement. Although at times, through private coercion, some part of investors' property has been seized and squandered, backlash reactions upon the subsequent composition of the assets stock have soon exceeded the gains. Any long-run benefits that some unions have won for their members have chiefly been at the expense of their competitors—laid-off or excluded workers—and at the expense of all as consumers and investors in noncompeting fields. The system has had a formidably depressive effect upon aggregate purchasing power (as distinct from aggregate money-spending power)—i.e., it has repressed the wages flow and real income and has therefore caused creeping, crawling, chronic inflation to be politically expedient.
The media consistently provide the clearest evidence of the impoverishing process. But they seldom perceive (or attempt or dare explain) the reason. I can here usefully refer to just one example: the editorial introduction of Elizabeth Beardsley Butler's Women and the Trades, edited by Maurine Weiner Greenvald. In terrifying innocence, Ms. Greenvald refers to "thousands of pages of research about labor exploitation" contained in "an arsenal of ammunition for social reforms."Elizabeth Beardsley Butler, Women and the Trades (Salem, N.Y.: Ayer Co., 1984), p. x. Ms. Greenvald continues by explaining that Ms. Butler "was one of the many foot soldiers in the war against industrialization."Ibid., p. xi. For me, these passages, written in 1984, express the real problem. Ms. Greenvald takes it for granted that those private entrepreneurs whose perception of the availability of the women whom they connected with consumers, by offering industrial employment, were exploiters of the women they so helped. In fact, they were among the real philanthropists of their age, for they were raising the living standards of the women to whom they offered jobs and prospects on terms that were better than any alternatives that society could then offer.
The truth is that nearly all the activities initiated under slogans such as "the War on Poverty" have, in fact, been poverty-creating. But will it ever be politically possible to restrain the most blameworthy poverty-creators of all (among the myriad of special interests that command governments), namely the AFL-CIO in the United States, the Trades Union Congress (T.U.C.) in Britain, and similar organizations in other countries? Yet politicians are often motivated to emulate the strike-threat system by enacting minimum-wage rates that make it an offense to employ any person the value of whose product is less than the stipulated minimum. This type of constraint, whether misguided or cynically exploited, has survived after two centuries of extremely clever propaganda. The impression has been left that the low marginal productivity of the poor and hence their low incomes are to be blamed in some way on those who employ them. Everyone is allowed to believe that the poor are the victims of "exploitation" by their employers.
Sweated Labor Early in the British Industrial Revolution, those who offered employment to the very poor came to be described by the abusive epithet, sweaters. The stereotype of the sweater was of a small businessman (often an immigrant and Jewish) carrying on his back a sack of materials cut to a required pattern.There was a definite tone of anti-semitism about the British anti-sweating movement of the nineteenth century. The profession of these sweaters was that of a small entrepreneur—typically, a clothing manufacturer. Sweaters would cut the different parts, for instance, needed to make a shirt. They would then call on houses in the poorer districts and seek out suitable housewives not fully employed in household chores, and they showed these women how to sew the different parts together. Later, they again would call to collect the product and pay for the outputs. They had no means of preventing any of these housewives from obtaining better-paying jobs. Yet the opprobrium worked up against this class was enormous. The sweaters were accused not only of underpaying, but of overworking these women, all of whom voluntarily and usually eagerly accepted the contracts offered them. Indeed, these small entrepreneurs were charged with working the seamstresses they provided with jobs to an early death. British humorist Thomas Hood's famous "Song of the Shirt" offered the refrain: "Stitch, stitch, stitch" followed by the line: "It is not linen you're wearing out, but human creatures' lives!"
The term sweated labor became common parlance in British socialist circles, while the famous historians of the trade union movement, Sydney and Beatrice Webb, used their literary skills to keep the notion alive. It is important to remember that these greatly aligned small entrepreneurs were never accused of using tricks to prevent other entrepreneurs from entering their territories. But the anti-sweating movement, largely financed, in its early years at least, by factory owners who complained about "the unfair competition" of small domestic manufacturers (who were not forced, as they were, to invest in expensive machinery), has continued right down to this day.
It was really a shock to see Dan Rather on a CBS news report resuscitate the myth and dress it up in modern clothing. He staged a woman forced to work at home on piecework for a mere pittance, with total earnings well below the minimum wage rate, in spite of deplorably long hours. Dan Rather's aim was, of course, an attempt to justify legislation that prohibited people from earning any income at all unless they could produce outputs that were salable (to the scoundrels engaged in this kind of business) for sums equal to or exceeding the minimum specified. How the hearts of millions of CBS listeners must have bled for the poor woman portrayed and the thousands of others like her!
But the only "exploiters" of such women are governments or private organizations (such as labor unions) that impose restraints on the free-market price of labor and so destroy entrepreneurial incentives to offer better-remunerated employments to all. Every such restraint is the result of coercion—by government or by the private use of the right to disrupt (e.g., the right to boycott, to strike, or to use intimidation and violence generally for the same purpose).
Unions and Blacks In the United States, black people have been most sedulously used by professional white and black "liberals" and unionists for their private ends. So-called liberal politicians have persuaded black voters to renounce the protection and assistance of the market and subject themselves to the mercy of the state (e.g., to the rulers of special-interest organizations).
The overwhelming majority of black leaders who attended a recent meeting of the Urban League and NAACP's Joint Summit Conference on the Crisis in the Black Family saw things differently. In a brilliant article in The American Spectator, William Tucker reports how "speaker after speaker recited the indictment that charges White America, once again, with consigning Black America to a permanent internal exile." Blacks, reported Tucker, "remain hypersensitive to every one of life's little frustations, particularly identifying every adverse event as some new form of 'discrimination.' "The American Spectator, July 1984, p. 14. Referring to the fact that about half of all black children in the United States today are "illegitimate," Tucker reports that today about three-quarters of them are being reared without the influence of a father.Ibid., p. 15. This is a recent and still developing phenomenon. Had the conference been genuinely concerned, however, with the well-being of American blacks, they would have directed their main attention courageously to the frightening prospect this situation is creating. Instead, the blame was usually laid on those hackneyed scapegoats, "joblessness, discrimination, poor education, poor housing, and the failure of the government to give us our share."George Gilder, quoted in ibid., p. 15.
Tucker interprets this as evidence that blacks as a whole "still refuse to recognize that it is the incredibly misguided 'charity' of the welfare system that is breaking up their families." He alleges that "the welfare process" is creating "vested interests that are going to be very, very hard to dislodge" if an attempt to reverse the trend is to be made in the future.Ibid., p. 15.
Tucker most effectively quotes George Gilder's "almost totally ignored book, Visible Man." Gilder says:
of sixteen. The State says, so to speak, to every black girl, "If you have a baby right now, we will give you your own apartment, free medical care, food stamps, and a regular income over the next twenty years. If you have another baby soon after, we will increase your allotment." How many teenage girls anywhere—Black or White, poor or affluent—can afford their own apartment and pay their own medical expenses at age sixteen? These teenage girls . . . are not morally weak, and they are not sexually lascivious. They are simply rational human beings making the most intelligent choice on how to improve.Ibid., p. 15.
Neither Tucker's nor Gilder's important contributions have, however, dealt mainly with what I believe to have been the most serious detriment that has brought about the current situation—namely, acquiescence in the pseudoprinciple of "the rate for the job" as a criterion for determining labor's just remuneration plus faith in the beneficence of wage rates enacted under nonmarket coercion. Had it not been for the influence of this pseudoprinciple (conspicuous in the rhetoric of the collective determination of the price of labor over the past century), blacks would, I submit, have been well on the way to enunciating a salable program developed to mitigate and solve a majority of the problems that now face them.
The National Urban League, in its report of this conference, frankly admits that "29 percent of all Black men between the ages of 20 and 64 . . . were unemployed in 1982."As reported by UPI in the Dallas Morning News, August 1, 1984. But as to causes, the League's research director refers only to inadequate schools, high arrest rates, and proportionately high murder and suicide rates. There seems to have been a reluctance to admit that the major cause of the damage wrought on the black people was due to the unwillingness of their community to fight aggressively for well-paid employment by deliberately reducing their per capita demands for wage compensation.
To sum up, in a free society, aggregate real income is maximized and inequalities of income are minimized when every person who wishes to be employed in any undertaking is offered and accepts the minimum necessary to be attracted from leisure or from other pursuits or employments, while those who provide the services of the assets they own are also paid the minimum necessary to obtain that provision or to attract their services from other occupations.
Hence, not a solitary cent of aggregate income has ever been transferred through strike-threat pressures from investors as a whole (the providers and owners of assets) to workers as a whole (the users of assets). The consequences have clearly harmed both groups, more or less in the same proportion, with regressive consequences on the aggregate wages flow. The effects upon the internal flow of savings and the import of capital are of course important, but there has never been a better mechanism for fructifying thrift and, thus, of insuring the advance of economic development than through competition in the free market.
One hears everywhere, however, that the political influence of the unions and the strength of the AFL-CIO and the British T.U.C. are so great that all who contemplate legislation to curb their power to deplete the wages flow are pursuing a hopelessly lost cause—a political will-o-the wisp. Certainly Parliament in Britain has tried to foster unionism by legislation that confers a monopoly of bargaining power upon a single union with the right to demand compulsory membership for all employees. This is a stark reality that we must face. And the position is not so different in the United States. But have not circumstances been creating a situation in which the great supposed lost cause can be turned into a triumphant battle cry?
The political influence of the labor unions, however, expressed largely through the federated bodies that I have been blaming (the AFL-CIO and the T.U.C), has throughout been impoverishing in the worst sense of that term, insofar as that influence has been used especially for the benefit of union membership; i.e., it has aimed at the entrenchment of privileged employment and the protection of the union officials' "profession." In other respects, while those representatives whom the union organizations support or finance may occasionally have used their powers in an enlightened manner for the common good, as spokesmen for the unions they have pleaded for and lobbied for the most sordid of special interests; and in this role they appear to have been conspicuously unconcerned about the interests of the working class as a whole.
Markets clear. Or so was the accumulated wisdom in the half century before John Maynard Keynes. The British economist proposed a novel theory of economics in 1936 based on the opposite premise: markets don’t clear. While Keynesian theory is quite complex and his book widely regarded as unreadable, in his system, chronic idleness of useful resources is the rule. In Keynes’s world, the market can find a market-clearing price through decentralized adjustments for most preferences among most goods. But two particular preferences are problematic in that the price system does not balance supply and demand. The two troublemakers are time preference and the reservation demand for money. Those two bad actors cause the market process to fail for everyone else.
The British Austrian school economist William H. Hutt was an underappreciated critic of Keynes. In Hutt’s The Keynesian Episode: A Reassessment, he distilled the obscurantism of “the new economics” into a series of clear propositions. When reduced to its essence, Keynesian economics is compelling in its absurdity. In Keynes’s version of reality, there are Good Preferences and Bad Preferences. The bad ones are so troublesome that an increase in either one can cause entirely different useful resources to lose the ability to command a money price altogether. The effect is so strong that a productive worker may become idle, not due to his own lack of skill or sloth, but due to someone else’s attempt to save. When a resource is stuck in this idle state, the owner and buyers cannot find a common ground.W.H. Hutt, The Keynesian Episode: A Reassessment (Indianapolis, IN: Liberty Fund, 1980), p. 105. Italics are original to all quotes from this book.
Time preference is the lower valuation that people place on a good in the future compared to the present. Time preference frustrates market clearance through the paradox of thrift. According to this construct, attempts by all savers in the community to save more in aggregate fail. Their attempts do not result in greater realized savings. It works this way: saving reduces spending on consumption but somehow leaks demand out of the system instead of creating a demand for something else (such as capital goods). Wikipedia explains: “[A]n increase in autonomous saving leads to a decrease in aggregate demand and thus a decrease in gross output which will in turn lower total saving.”
Prior economic teaching had identified time preference—the choice between provision for present needs and future needs—as the originating cause of interest. Reservation demand is the demand that the owner of a good exercises by not selling it or by holding out for a higher selling price. This preference itself is largely irrational, driven by what Keynes saw as an excessive and irrational preference for liquid assets. Interest in Keynes land is entirely caused by the reservation demand for money.
Saving and investment in the Keynesian story are unrelated activities—not two sides of a single market. Because investment is interest rate sensitive, an increase in the reservation demand for money can cause the interest rate to be too high, attracting more savings which are not realized as investment. Investable resources thus remain unused.
Hutt took the other side of this. To his thinking, “time preference and so-called liquidity preference are no different in principle or in practice from all other economic preferences.”Hutt, Keynesian Episode, p. 106. He asks this:
Why should two particular expressions of preference concerning ends, namely, that between the present and the future (thrift), and that between the services of money (liquidity) and all other services, or the response to those preferences in the form of certain ways of using the scarce means available, give rise to unemployment?Hutt, Keynesian Episode, p. 105.
Hutt—and Keynes—were largely dealing with the problems of surplus labor in 1930s Britain, in which the sellers of labor were represented by labor unions (or simply unemployed people with unrealistic wage expectations). Hutt wrote many times about the problem of surplus, whether unemployment in labor markets, inventories, or capital goods. He placed the responsibility for chronic surplus largely on sellers who would not lower their asking price. In most cases of surplus, the seller was usually asking for a price above what potential buyers would or could pay. While there are buyers making an offer in almost any market, for anything that is useful, if the buyer does not agree, then no exchange will take place.
Hutt thought that where there is a surplus, it was the seller who needed to come down to meet the buyer, rather than the buyer offering more. The business firm works on behalf of the consumer. They will make a wage offer based on the contribution of the worker toward the price the consumer is expected to pay for a product. Under depressed conditions, the consumer may be willing to pay less. Entrepreneurs may be even more cautious about the selling prices they expect. But, at some price, said Hutt, “there is always complete absorptive capacity for all potential productive services which have value.”Hutt, Keynesian Episode, p. 153. The wage expectations of unemployed labor at the time were unrealistic if under the existing conditions businesses could hire the idle workers and make a profit only at a lower wage than the unemployed were asking.
Hutt blamed the failure of the market price system to clear labor markets on the political power of labor unions. By using the threat of strikes and organized violence with the tacit approval of governments, they were able to contract a nominal wage which looked good on paper. But in practice the wage was not paid, because it was not affordable to the businesses where the workers might find employment. Hutt also took to task welfare systems that incentivized people not to work.
Idleness of useful things was not due to irrational money hoarding or miserly oversaving. It did not require a new theory of economics. It did not require a falsification of Say’s law. It only required that the price system be allowed to do its job. Hutt wrote, “The origin of such ‘economic disturbances’ must be attributed, I suggest, solely to the factors which prevent the value system from performing its coordinative task.”Hutt, Keynesian Episode, p. 165. Anything which has value has a money price at which it can be sold. All useful labor and capital goods can contribute to production when priced for market clearance.W.H. Hutt, A Rehabilitation of Say’s Law (Athens: Ohio University Press, 1974), loc. 1661, Kindle.
For there are no economic ends, and no entrepreneurially chosen means which are incompatible with “full employment”. Entrepreneurs will never fail to use the full flow of productive services if the price mechanism is allowed to work or made to work. The only “collective behavior” to be set right is that of the propensity to resist price adjustment.Hutt, Keynesian Episode, p. 165.
F.A. Hayek in taking on this same point wrote:
[Keynes] has given us a system of economics which is based on the assumption that no real scarcity exists, and that the only scarcity with which we need concern ourselves is the artificial scarcity created by the determination of people not to sell their services and products below certain arbitrarily fixed prices.Hazlitt, Critics of Keynesian Economics, loc. 2605.
Changes in any preference do not cause valuable resources to remain priced out of use so long as other prices can adjust. A wage that worked yesterday may be too high today in light of changed conditions. Entrepreneurs motivated by loss avoidance must stay on top of the market and adjust their offers and their asking prices. Workers must seek alternative employment when their line of business is in decline if they do not wish to accept a lower wage, or work for a lower wage if they wish to remain in a declining industry.
Keynes was confused about the difference between a preference that caused resources to be unused and the inability of the system to adapt to a change in that preference. Keynes’s theory blamed the former cause, Hutt, the latter. Hutt showed that changes in time preference do not inherently cause useful things to lose all value within the price system. Even when people save more, all useful things can still participate.
Certainly, while abnormal provision for the future [an increase in time preference] is in progress, a bidding down of the relative prices of goods of short life expectancy, in relation to the prices of goods of long life expectancy, will occur (the impact upon prices varying in proportion to the life expectancies of assets and the degree of versatility in the assets stock and in labor’s efforts and skills). But, as I have already insisted, all large autonomous changes in human preferences require far-reaching coordinative adjustments and hence large changes in relative prices.Hutt, Keynesian Episode, p. 174.
When people wish to save more, the most useful employment of many things will change. Wages will fall in the consumption goods industries, reflecting the fall in value of the final product. Demand for labor will increase in the capital goods sectors. Workers may need to change jobs—even change industries—and adapt to a new line of work in order to receive the highest wages. Existing inventories may need to be sold at a lower price than expected. A large number of small—or even large—adjustments will follow on. Yes, if those prices do not fall where they must, then surpluses of those goods will accumulate. While Hutt does not focus on shortages and scarcity pricing due to a price not rising quickly enough when there is more demand, shortages can also arise.
The production of goods proceeds through stages. The outputs of each stage can be fully absorbed into the next stage if priced properly. The product at each stage will be profitable as long as prices of inputs and outputs are adjusted and so long as businesses are adapting what they produce to what people want, not what they used to want. Hutt explains:
When prices are coordinatively determined, then, not only are final prices fixed in relation to money income and consumer preferences, but the prices of services and intermediate products at all stages of production are fixed in relation to expectations of demand at the next stage. Prospective prices at the next stage of demand are in turn derived from predictions of demand at subsequent stages, including the ultimate demand for the final product.Hutt, Keynesian Episode, p. 138.
Keynes missed the need for these adjustments because of the excessive aggregation of his model:
It was partly through the clumsiness of the macroeconomic approach that Keynes came to believe that the idleness of valuable productive resources (he stressed labor) is caused by factors other than the mispricing of the flow of services and products. For instance, the clumsy concept of the price of labor, conceived of as the hourly money wage (a sort of average wage rate of labor of all kinds), is, in a large part of the argument, taken as constant. And when Keynes did think in terms of this “price” having a crucial task, he seemed to assume that the adjustment required to induce full employment is an equal percentage reduction in all wage rates and secondly to assume that rises or falls in the general level of wage rates correspond to rises or falls in the general flow of wage receipts.Hutt, Keynesian Episode, p. 111.
Reservation demand for money is the other problem child in the Keynesian world. In Hutt’s terminology, this is the preference for the services of money compared to the services of nonmoney. The active investment that market actors make in their money balances provides the useful service of “availability.” By this Hutt meant that money can easily be exchanged for other goods. Having some of it around gives the holder choices and options. People can choose to invest more in money in order to have more choices in the future.
Money demand increases when some individuals raise the ranking of some additional units of money in their preference scales from lower to higher than some other goods. Hutt also identified the speculative purpose for investing in a greater money balance. Some people expect money prices of some goods to be lower in the future than they are now and plan to buy more in the future than they are able to at current prices.
Then what of reservation demand for money? Is it so problematic as Keynes suggests? Keynes saw an increase in reservation demand for money as a fall in aggregate demand, for which price adjustments could not compensate. It would create a systematic discoordination between savings and investment. Hutt explained Keynes’ position as, “at times people may cease demanding nonmoney services and goods because they demand … the service of money.”Hutt, Keynesian Episode, p. 138.
Individuals and firms are able to adjust to changes in both the supply of and demand for money according to Hutt. Those who want to increase cash holdings will reduce money expenditures and attempt to increase their money income through some mix of lower offering prices for things they buy and lower asking prices for their services. If roughly the same number of people wish to increase their money demand as decrease it, then there is no systemic change; existing money balances are shifted. Some people end up with more cash, others with less. If there is an overall shift in preferences by most people toward holding money, this cannot be accommodated by some people holding more and others the same if the money supply is not growing. Instead, prices will generally fall. This allows everyone’s money balances to increase in real terms. With lower prices, existing money balances are worth more even with the money supply unchanged.
The fall in prices is not separate from the increase in money demand, but is the means by which the change in money demand is realized. A large increase in money demand requires many price changes across many markets. As with changes in time preference, as long as there are no institutional barriers to price movements, all productive assets and labor can remain in productive use. Hutt argues:
It is wrong to blame speculative changes in the demand for money, still less autonomous changes in it, for the strains which as yet uncoordinated major value changes create in the economy; for to do so is to confuse a response to a disturbing condition with the disturbing condition itself.Hutt, Keynesian Episode, p. 165.
While saving preference and the demand for money are the most important preferences in the market economy because they both affect nearly every other price, the price system, said Hutt, is fully capable of adapting to changes in either one. He wrote:
[W]hen Keynesians blame thrift, they are turning attention away from the failure to adjust prices to changing preferences; and when they blame hoarding (liquidity preference), they are turning attention away from the failure of governments to tackle the problem of unstable price rigidities.Hutt, Keynesian Episode, p. 107.
Keynes’s arguments rely on the assumption that prices cannot change. There is no other way for markets to be stuck in a chronic surplus. The assumption of price rigidity was not clearly stated, and is often difficult to untangle from the complexity of the Keynesian system.
Keynes attributed the persistence of idle resources in Britain to what Hutt called “imaginary defects” in the market. His theory aimed to show that changes in time preference and money demand could throw the whole system into discoordination. The Keynesian system was an attempt to overturn a half century of progress in economic theory demonstrating that a decentralized, self-corrective market process in which individuals and firms pursue their own ends resulted in a coordinated supply chain from producers to consumers.
When we last saw Bernie Sanders at the Joe Biden inaugural bundled and wearing a mask, some of us hoped that Bernie would still be masked—and silent. Unfortunately, as it becomes increasingly clear that the Biden administration is wanting to transform the USA into a progressive paradise, Sanders has joined the movement in which no institution is safe from an enforced state makeover.
The latest from Sanders is the introduction of a bill that would classify collegiate athletes as employees of the college or university they attend, and it also “encourages” athletes to become unionized so they can enjoy the “right to collectively bargain.” According to CBS Sports:
College athletes would be considered employees who are able to collectively bargain for basic labor rights if a new Congressional bill introduced Thursday morning eventually becomes law.
Sens. Chris Murphy (D-CT) and Bernie Sanders (D-VT) have sponsored the College Athlete Right To Organize Act in the Senate. The bill defines "any college athlete as an employee if they receive direct compensation" from their school in terms of scholarship money.
That presents a direct challenge to the NCAA's [National Collegiate Athletic Association] long-held operating principle of amateurism that has allowed it to maintain control over college sports for decades.
The bill would prohibit any scholarship that would keep an athlete from collectively bargaining for their rights. Scholarships would be defined as compensation that would give athletes the right to collectively organize and have a say in their working conditions. Companion legislation was also introduced in the House of Representatives by Representatives Jamal Bowman (D-NY), Andy Levin (D-MI), and Lori Trahan (D-MA).
While one doubts that this particular scheme will be successful, nonetheless it sets a precedent that will be hard to ignore in the future, especially given that the US Supreme Court voted 9–0 to force the NCAA to change its limits on compensation for athletes. The present herd of Jacobin progressives that hold much of the political power in this country and govern many of its key institutions like education and the media are not going to go away if this present bill fails to accomplish its purposes—and they are decidedly not attempts to improve the lot of scholarship collegiate athletes. Moreover, the SCOTUS decision will increase the “inequity” that progressives claim to hate.
Before going further, I will point out that nearly fifty years ago, I was a scholarship track-and-field athlete at the University of Tennessee, and I had a relatively successful career. I held some school records in high school and college and still am on some of the program’s all-time performance lists, and I was part of six Southeastern Conference championship teams and two NCAA championships, and I had the good fortune of earning both All-American and All-SEC honors.
This doesn’t make me an expert on collegiate athletics, but my experiences have given me some insights into that world and, more importantly, provide me a smidgen of authority to speak out against Sanders’s latest attempt to wreak havoc in this country. I can say without hesitation that Bernie is flat-out wrong in his pronouncements that collegiate athletes represent an “exploited” class of people who need to be “rescued” by politicians and union bosses. Yes, I am aware of the rhetoric that comes from the sports media, but the reality of NCAA Division I college sports is very different, and even though I am more than four decades removed from my stint at Tennessee, I have stayed in touch with my alma mater and have made many visits to the track and the coaches offices since my graduation. The reality of college sports does not match Sanders’s rhetoric, some of which is contained in the proposed bill:
College athletes face exploitative and unfair labor practices by the National Collegiate Athletic Association … and its member institutions, primarily through the denial of the basic economic and labor rights of such athletes, which the NCAA and its member institutions have justified by defining college athletes as amateurs.
The NCAA and its member institutions have denied college athletes a fair wage for their labor by colluding to cap compensation; they maintain strict and exacting control over the terms and conditions of college athletes' labor; and they exercise the ability to terminate an athlete's eligibility to compete if the athlete violates these terms and conditions….
To establish more equitable terms and conditions for college athletes' labor, college athletes need representation of their own choosing to negotiate collective-bargaining agreements with their respective colleges and the athletic conferences that help set rules and standards across an entire league.
Sanders was a highly regarded distance runner in high school (he went to high school with Walter Block) but did not pursue college sports. (One suspects our country might have been better off had he been on a college track team and have become something other than a politician, but that is water under the bridge.) His “knowledge” about the poor, exploited collegiate athlete is derived more from his ideology than his experience.
So, what about the “exploited” collegiate athlete? First, while I will defend the current system to a certain extent, I do not extend that grace to the NCAA itself. This is not because of any “hypocrisy” on the part of NCAA officials—although they clearly have earned this label—but rather because in its zeal to “protect” the so-called amateur status of collegiate sports, the organization has created a Byzantine bureaucracy that would rival anything from the former Soviet Union.
A highly regarded head track coach of a mid-major university told me that in order to have a prospective athlete visit on campus, he had to prepare twenty pages of documents to give to the NCAA and its representative at his university. (Several years ago, I served as the NCAA representative for my employer, Frostburg State University, which then was in Division III sports, which does permit its institutions to offer athletic scholarships. I still serve on the university’s athletic board.)
The NCAA has so many rules governing recruiting and regulating any benefits that athletes may receive that it is impossible for any member institution to keep from violating regulations. Compliance with these rules is a nightmare. Consider some of the violations:
A football prospect driving with his family to visit the campus of a D-I institution had the car break down about twenty miles from the university. An assistant coach picked up the player and helped the family call for assistance. The NCAA rules this an “improper benefit.”Three student athletes (at the University of Oklahoma) received food in excess of NCAA regulation at a graduation banquet. The three had graduated from the school but returned for an additional season of competition. The players were provided pasta in excess of the permissible amount allowed. Resolution: the three were required to donate $3.83 each (the cost of the pasta serving) to a charity of their choice in order to be reinstated. The department provided rules education to applicable athletics department staff members. The list, unfortunately, is endless and the mentality that accompanies calling out these so-called transgressions is worthy of all the ridicule that can be heaped upon it. One is tempted to dismiss these things as the products of people who have too much available time, but there really is logic in what seems to be petty regulations on steroids. (I guess better the regulations be steroid engorged than the athletes, who are required regularly to undergo drug testing.)
One truism in economic analysis is that ridiculous regulations tend to have perverse incentives behind them, and the rules are not irrational as one might think, given the players and the reward structure behind them. While many economists have tried to model the NCAA as a private cartel in which the rules are the enforcement mechanism, I believe that it is more accurate to say that we should frame major collegiate athletics as a regulated industry much like passenger air before deregulation in 1978, and trucking and railroads before 1980.
Pre-deregulation, the Civil Aeronautics Board set rates for passenger airlines as well as the routes for the more profitable “long hauls” between major cities. The arrangement blocked entry into the industry and all but guaranteed that airline firms would be profitable. In return, airlines serviced smaller cities, subsidizing these unprofitable routes with profits, much like AT&T used profits from its long-distance service to subsidize local service (when AT&T was given a legal monopoly by the Federal Communications Commission).
Because they were not permitted to compete via lower airfares, the airlines competed on the intensive margins, resorting to the hiring of young, beautiful women as flight attendants (I remember those days well), good food (yes, that is hard to believe today), and one airline even had a piano bar for first-class passengers. Flying was for the well to do; everyone else took the bus or passenger trains (at least until the early 1970s).
Likewise, we find college sports engaged in massive cross-subsidizing, using profitable sports such as football and men’s basketball to subsidize other “nonrevenue” sports. (I remember being constantly reminded in college that our sport didn’t bring in revenue to the athletic department. It was one reason I didn’t resent the special perks football and basketball players received, knowing that they were helping to fund my scholarship and our team’s enormous success.) Even that might not be enough, and the subsidies are extended to the conferences and to the money the NCAA spreads out after its money-making basketball championships, aptly named “March Madness.”
Like the airlines that couldn’t compete via pricing, college sports must find other ways for teams to compete for key resources (athletes) than offering them a better financial deal. Thus, we see the advent of the facilities “arms races” in which colleges and universities build athletic venues that would have been scorned as unnecessary by previous generations of coaches and athletes but today are deemed vital necessities for programs wanting to be competitive.
Furthermore, with Title IX strictly enforced as a quota system, there is almost no profitability whatsoever with women’s sports, save women’s basketball in a few universities that historically have had successful winning programs. One is safe to say, then, that college athletics overall cannot be classified as a money-making venture even when there are entities in that system that are profitable. While athletes can be called (economically speaking) factors of production that might fit into something that creates what Murray N. Rothbard called “psychic profit” (a successful sports team can bring “pride” to a university and serve as a rallying point), there is no way one accurately can claim that athletes are employees of a university’s department of athletics. At very best, at least for most colleges and universities, collegiate athletics is a loss leader, not a money-generating enterprise.
Thus, to classify collegiate athletes as employees and then demand those employees be unionized is a logical and economic absurdity (although people like Bernie Sanders have made careers out of promoting absurdities). Yes, some athletes receive in-kind subsidies from their colleges or universities (called athletic scholarships), but athletic scholarships are similar to academic scholarships, under which students are expected to keep a certain grade point average (GPA) and stay out of trouble. With athletic scholarships, athletes are expected to perform at certain levels, stay academically eligible, and not create problems on or off the field.
That being said, there is one important difference between students receiving athletic grants and those that have academic or, say, music scholarships: the latter do not have limits placed upon what they can receive in compensation outside the in-kind benefits they receive from their university while athletes cannot enjoy that same privilege. For example, a student on a violin scholarship can play in an outside orchestra or ensemble and be paid. (I remember throwing money into a basket in a New York subway station while a string quintet from Juilliard entertained us.)
Collegiate athletes are much more restricted. For example, a collegiate basketball player cannot be paid for performing in a summer league or have ever received payment for playing a sport. Say someone played at the lowest level of professional baseball for one summer and then wanted to go to college and play basketball. To that, the NCAA says, “Nyet.” That summer of making a tiny amount of money has “contaminated” this athlete for life, at least where college athletics are concerned, even if we are dealing with a different sport than the one for which the athlete was paid.
These are the kinds of rules that turn people against the NCAA and help encourage lawmakers like Sanders to intervene. Nevertheless, they are not proof of oppression and exploitation of hapless athletes. Let us take first the issue of compensation or scholarships. Division I FBS (Football Bowl Series) football teams have eighty-five scholarships, which means that most of the players you see on the field have what we call “full rides.” Most basketball players, men and women, are on full rides as well, although the lineups for football and basketball also include “walk-ons,” or nonscholarship players.
Other sports have fewer scholarships and generally split them up among players, often into what we call half rides. For example, when I was at Tennessee, our team had twenty-eight scholarships, which meant we could have a large roster because we could have a large core on full rides and still plenty of money to dole out to others. (The women had no scholarships when I was in college, although that would change soon enough.)
Today, track teams are permitted up to 12.5 scholarships for each team, which means rosters are smaller and most of the athletes are not recipients of full rides. The same goes for the other sports classified as “nonrevenue.” Even in that situation, however, athletic scholarships hardly count as “poverty wages” or whatever term Bernie Sanders might use. Yearly tuition, fees, and room and board at a place like Duke University is about $70,000, so a full athletic scholarship hardly falls into the zero-compensation category. Likewise, out-of-state costs at many Division I state universities are likely to be close to $50,000, a rate of pay that few students that age can attain in the regular world of work. (Many D-I sports teams recruit out of state as well as in their home states.)
Furthermore, one of the assumptions behind the rhetoric that Sanders and other critics are spouting is that athletes are the modern-day equivalent of slaves working in Roman salt mines. (For that matter, Sanders believes that ANYONE working nonunion for a private employer is the proverbial Roman salt mine slave.) However, being part of a Division I athletic team not only is a symbol of personal status on campus, but also provides a lot more than just scholarship money for athletes. Most of my teammates from nearly a half century ago now are lifelong friends and we value these relationships highly. We also keep relationships with current members and coaches from the Tennessee track teams. The notion from Sanders that we were mere slaves toiling for an undefined benefit to the university and receiving nothing in return is perverse and, unfortunately, par for the course where Sanders is concerned. One comes to expect this kind of nonsense from him: destructive, hateful rhetoric that when it helps form laws and policies, they always make things worse.
So, what if the colleges start paying players? First, what does that mean? As I have noted before, a college athletic scholarship is valuable, and because the vast majority of athletes that use their entire college eligibility graduate, these “exploited” athletes also receive the value of a college education. (Yes, I am fully aware of the problems in higher education; however, I am pointing out that most college athletes do not walk away empty-handed, as Sanders and his ilk want us to believe.)
Because an athletic scholarship is a thing of value, I doubt that paying athletes directly instead of awarding grants is going to make much difference. Because the majority of athletes play in nonrevenue sports, there really is no measure of discounted marginal revenue product that would easily fit a payment schedule. I had a good career as an athlete, yet I doubt that my DMRP was anything but negative, and that goes for most (if not all) of my teammates. We didn’t generate much revenue and, instead, were subsidized by revenues from football and men’s basketball.
In any collegiate D-I athletic program, there are relatively few athletes that one actually can say bring in the revenues. Zion Williamson, who dominated college basketball the one year he played for Duke University, comes to mind. While Duke didn’t win the NCAA championship that year, Williamson was a major draw and I’m sure that his worth, athletically speaking, to Duke was in the millions of dollars.
While Williamson did not “officially” receive anything but tuition, fees, room and board, one hardly can say he was “exploited” or treated like “slave labor.” First, I’m sure that people associated with Duke, not to mention Nike, which all but openly sponsored him, made sure that his family was well compensated, albeit quietly to avoid an NCAA investigation. Second, Williamson could have played in the NBA’s G League and earned a six-figure salary, well above the value of his athletic scholarship and probably any under-the-table money he might have received.
However, the G League could not have provided Williamson the same publicity as he received dominating game after game while being viewed by millions on ESPN. There is no doubt that Williamson received a much better rookie contract in the NBA than he would have received had he done his time in the G League. At worst, Williamson’s year at Duke could be seen as his enjoying deferred compensation.
To get an idea of his massive presence in college basketball, he suffered a sprained knee early in a game with the University of North Carolina when one of the shoes Nike had provided him ripped under pressure. Nike’s stock value dropped $1.1 billion the next day.
I repeat, contra Sanders, that college sports did not victimize Zion Williamson, despite the claims otherwise. Furthermore, had Duke paid him anything close to his value to the university and its athletic programs, it would have been a figure that Sanders would have deemed immoral, since he claims to be against any sort of economic inequality.
In fact, if a market-based payment system were to be implemented by the NCAA, it would have to reflect the realities of what people actually are producing. Male athletes would have to earn more than most female ones (although there are exceptions; Paige Bueckers of the University of Connecticut women’s basketball team comes to mind), and a relatively small number of athletes would receive the lion’s share of the income. In other words, the only compensation scheme that would not exploit the Zion Williamsons of college sports would have to reflect the same kind of inequality that people like Sanders claim to abhor.
My sense is that Sanders sees something different, a system in which everyone receives the same pay no matter what sport and the entire apparatus is wrung through collective bargaining. Yet that would change nothing regarding the so-called exploitation issue. If the Sanders bill were to become law, it surely would ramp up the costs of fielding college sports programs, and higher costs certainly would mean fewer teams. Moreover, the “equal pay” provisions of the law would mean the star athletes, the ones people really do pay to watch, would receive compensation much less than their actual economic contributions, which really would be an act of exploitation. In short, it would be an unworkable disaster akin to the Bolshevik Revolution and its aftermath that Sanders effusively praised through most of his political career.
There is one more problem, one that I have not seen addressed by any analysts, and that involves federal and state income taxes. College scholarships, whether they be for sports or for academics, are not taxed. As I noted before, a student on a full ride at Stanford or Duke is receiving a financial package worth at least $70,000 a year and probably more, without a penny of it going to the IRS or the state comptrollers.
College and university employees, however, are not tax exempt and must pay federal and state income taxes along with Social Security and Medicare taxes. If Sanders were to succeed in having all NCAA Division I athletes reclassified as employees, then not only would these students be liable for income and payroll taxes, but many of their so-called perks such as payment for travel costs and per diem expenses could be grist for the taxation mill.
One doubts seriously that students would be enthusiastic about paying double-digit tax bills for their scholarships. It is one thing to raise the union fist to show fake “solidarity” with the proletariat, but it is quite another to receive a sizeable tax bill for the whole thing. Furthermore, one doubts that the courts would be willing to cut out a huge tax exemption for NCAA athletes, especially given the greedy proclivities of the IRS.
To put it another way, the Sanders proposal comes with all of the hidden costs and other unwanted surprises that one would expect from a politician who has supported totalitarian governance for all of his political life. One suspects that once student athletes would come to realize that Sanders had pulled a bait and switch aimed at increasing tax revenue, and then publicly declared their opposition, Sanders and his allies would regard the new dissidents the way that Bernie’s political forefathers saw the demands of the Kronstadt sailors in 1921: a threat to the regime that the IRS would put down quickly.
With the ending of Democratic Party dominance of politics in many state capitols, right-to-work (RTW) laws, which ban conditioning employment on the payment of union dues, are on a roll. Kentucky, Missouri, and West Virginia have recently adopted them, raising the total to 28 states.
Unions have demonized RTW laws as unfair. However, it is hard to see abuse in what obviously advances individual workers’ freedom of association, which Thomas Jefferson called “the guarantee to everyone the free exercise of his industry and the fruits acquired by it.” In other words, individual freedom of association is an essential aspect of self-ownership, or economic liberty, which includes the right not to be forced to associate with certain groups, including unions, against one’s will. Consequently, preventing unions from violating individuals’ rights and wallets is not unfair.
So how do unions justify using their unique, coercive government backing to impose employment terms that violate government’s primary role — protecting individual rights? Supposedly to solve a “free rider” problem.
Again, the "Free Rider" Problem Unions have repeatedly asserted that labor law requires them to represent all workers, not just those who voted to certify their union. Given that mandate of exclusive representation, unions assert that that every worker must be forced to pay for their representation, or else workers not forced to pay would “free ride” on union representation services. So the rights of individual workers must be sacrificed to stop the potential for free riding. Unions have pushed that argument to the point that they have gone to court to get RTW laws overturned as unconstitutional takings of union property.
However, as the Wisconsin Court of Appeals recently held, rejecting such claims, “Unions have no constitutional entitlement to the fees of non-member employees.”
Under the rules of logic, conclusions only follow when both the premises are true and the reasoning is valid. But if premises are false, even if the reasoning based on them was valid (a standard far from satisfied by unions’ arguments), the conclusions drawn exceed, and may well even reverse, what can logically be supported.
The union free-rider argument’s central premise — that they are required by law to represent all workers — is false. In fact, while the National Labor Relations Act (NLRA) allows unions receiving majority support in a certification election to choose to represent all employees (“exclusive representation”), it does not require it. A union can choose not to bargain exclusively, and only do so on behalf of those who have chosen to be its members (“members-only representation”). Since unions can choose members-only representation, they have the power to completely eliminate the free-rider problem at their sole discretion. Their own choice to exclusively bargain causes the problem they complain so loudly about.
Despite being given an option, virtually all unions choose exclusive representation. Consequently, they have no legitimate claim on others due to their own choices. With their premise falsified, their argument fails.
That, however, leads us to another question. Why would unions that decry the burden of free-riding workers when the unions can avoid those burdens by simply choosing exclusive representation?
Exclusive representation must advance rather than harm union interests. And if so, the union leadership must gain more from exclusive representation instead of members-only representation, even with any free-riding taken into account.
The Main Problem Is With Union Monopoly Powers In other words, the problem is monopoly unionism, created by exclusive representation, at union discretion, to the detriment of all workers who would not have chosen it. That list of those who lose from monopoly unionism include:
Those who supported another union (including any members-only options) or other form of group representation and negotiation.Those who wished to represent themselves, union-free, with management. Those hired after an exclusive representation union is certified, who are denied any effective chance to ever vote “no.”This latter group is particularly important to recognize, given that many unions were certified so long ago (e.g., General Motors’ Michigan factories, organized by the UAW in 1937) that no one now working for GM there ever voted for the union, which they inherited rather than selected.
The primary way unions gain from exclusive representation is that it vastly strengthens their negotiating power. Labor law requires that firms negotiate with exclusive representation unions, but they need not negotiate with members-only unions. Therefore exclusive representation gives unions monopoly power they would otherwise lack. And the benefit to a union of such monopoly power, as revealed by their own choices, must be far greater than the costs of any actual worker free-rider problems that might go with it.
That is, instead of unions’ preferred story of free-riding workers, the central story is that adopting exclusive representation allows union leaders to free-ride on unwilling workers (who are therefore forced-riders more than free-riders) for their own benefit. And the fact that union leaderships could benefit themselves even more by coercing still more money out of those already coerced into exclusive representation, which is what they are actually seeking, is a far cry from being relieved of alleged harm others impose on them.
The monopoly power exclusive representation creates also provides unions the ability to sacrifice the interests of younger workers to older workers, who dominate union leaderships. Since younger workers cannot represent themselves except through their existing union, their interests can be sacrificed. Focusing on pensions, seniority systems, and preventing change that would threaten older workers’ jobs may benefit long-time members, but that imposes disproportionate costs on younger workers, which they could escape if they were offered the option of self-representation or members-only representation. Exclusive representation takes away that escape option, making many younger union members forced riders as well.
Union rhetoric may try to disguise forced riding that harms workers and benefits unions as necessary to solving a supposed free-rider problem, but that doesn’t make it true.
November 10 marks the 10th anniversary of the death of someone the Mises Institute has named “one of the giants of the Austrian tradition” — Sylvester Petro. Since 2017 also marks the 100th anniversary of Petro’s birth and the 60th anniversary of his best-known book, The Labor Policy of the Free Society, described as “the definitive Austrian treatment of the topic,” it is very much worth remembering his wisdom.
Petro was a law professor, primarily at NYU and Wake Forest. He lectured widely and wrote many books and articles, primarily on the free society, labor law and history, contract law and antitrust law. In addition, his obituary described him as “a member of the Mont Pelerin Society, a tireless worker for the Foundation of Economic Education, and the National Right to Work Committee.” One of his colleagues for over a decade, Norman Dorsen, said of him, “Sylvester Petro was an unabashed libertarian, strongly maintaining that government regulation of the economy was undesirable in almost all circumstances.”
In an extensive body of research and writing, a short article cannot do him justice. So I will focus on Chapter 7, “Trade Unions in the Free Society,” in his The Labor Policy of the Free Society, as it offers a good, non-technical, discussion of his core beliefs about their intersection, starting from individuals’ freedom of association.
A good way to introduce Trade Unions in the Free Society,” is to begin with two notable quotes from John Stuart Mill which open two preceding chapters. Chapter 2 begins with: “…but the only unfailing and permanent source of improvement is liberty, since by it there are as many possible independent centres of improvement as there are individuals.” Chapter 3 complements that with: “The only freedom which deserves the name, is that of pursuing our own good in our own way, so long as we do not attempt to deprive others of theirs, or impede their efforts to obtain it.”
Joel Seidman’s 1958 review of The Labor Policy of the Free Society in the University of Chicago Law Review also provides a good summary. In his words:
The author starts with the free, competitive market and the rights of private property and freedom of contract. By strict adherence to these rights and principles, he believes, the free society can be built, with freedom, well-being, and security assured. … Consequently, he would abolish every form of intervention by the state, restricting its function to that of keeping the peace. … With the conditions of peace and freedom thus established, the function of advancing the interests of the citizens is best left to them, acting individually or in voluntary associations. The sole restrictions are that they may not invade the property rights of others, that they must avoid violent, coercive, or fraudulent conduct.
With the above background, consider some of Sylvester Petro’s most insightful words contrasting freedom, especially freedom of association, with unions empowered to coerce individuals in his (from Trade Unions in the Free Society):
Trade unions in a free society embody the right of working men, shared with every other member of the society, to join together in the pursuit of common interests ... society demands of the private association only that it refrain from advancing the interests of its members by antisocial means.Trade unions misconceive their role if they assume either that they must or that they may legitimately utilize compulsion.Trade unions achieve their own corruption if they coerce and compel … they add substantially to the forces constantly at work in the continuous struggle against the free society by the totalitarian spirit.The theory of the free society only prohibits to men in trade unions the invasion of the property rights of other members of society. … If men wish to form or join a union, they are free to do so. If, having combined in order to promote their own economic and other interests, they decide to withhold their labor in concert, they are free to do that, too, so long as they do not invade the property rights of others by their concerted action. …The free society declares to trade unions only that they may not regulate the conduct or impair the rights of others.Whether or not trade unions contribute to the achievement of the material and nonmaterial goals of men depends entirely upon whether or not they act, or are made to act, consistently with the rules and principles of the free society.Free trade, leading to greater productivity and capital investment, appears to be the explanation of the economic process which creates the high standard of living prevailing in the United States … trade unions have nothing whatsoever to do with this process. And when trade-union leaders boast of how much they do as regards raising living standards for society as a whole, they are simply taking credit which does not belong to them.The main reason for the poor performance of many American trade unions is that they alone, among the “voluntary” associations of this society, have tended to use violent and coercive methods at every stage of their operations. … No other private association has so habitually terrorized and exploited both members and nonmembers.Coercive conduct has been characteristic of trade unions in this country throughout our history at all levels of union action. … Fashioned to a great degree by coercive methods, trade unions in this country tend to use coercion habitually.Unions and their members can and do raise their own wages over free-market levels; but in each and every instance that they do, they exploit their fellow workers and consumers.A viable, effective labor policy would need only eliminate from unionism its violent, coercive, monopolistic practices … an enduring labor policy need only be oriented in terms of the basic operating principles of the free society — private property and freedom of contract.Sylvester Petro made it clear that the source of all union abuses was coercive power. But no private association, in a free society, should have such power. That pointed to eliminating such power as the solution to union problems as we have experienced them. As he summarized his argument in chapter 18, “Free Collective Bargaining,” we would do far better, at a far lower cost to society, if we left labor relationships to freely chosen market arrangements.
Free collective bargaining is a principle inherent in the theory of the free society and differs in no material way from other institutions of the free market. Far from clashing with the free society, it is a product of one of the basic rights in such a society, the right of free association.
The free market can provide the means of civilized settlement of even the most complicated industrial disputes. If it is to do so, however, all violent, coercive, and monopolistic interference in its operation, whether by unions or employers, must be eliminated.
Immigration is a highly contentious topic in modern societies, with almost all of the different regimes across the OECD showing failures on some measure. As populist responses increase to rising levels of immigration, a policy solution must exist that assuages the concerns of those who have gripes with the current system in order to maintain political stability. Amongst the myriad of potential immigration policies, the one that stands out with the most suitable incentives is that of private sponsorship.
Private sponsorship asks that either an individual or an organisation from the host country vouches for the potential immigrant before they arrive. They bear the risks associated with immigration. For example, if the individual commits a crime, the sponsor would have to pay the costs of judicial process and deportation. The added benefit of allowing private organisations or individuals to sponsor immigrants is that the government no longer needs to pry into personal affairs, asking why someone is coming or why someone is a sponsor. It would simply be assumed that by bearing risk, the sponsoring party is making a rational decision. This incentive results from the skin in the game principle, that those who bear the risk of an action are more likely to make better decisions.
Private sponsorship regimes prove superior to current systems by removing the bureaucratic issues currently associated with immigration. Among these problems is the arbitrariness of certain features, such as quotas or occupational restrictions, which change over political cycles at great costs to current and potential immigrants. Another problem is the application of Goodhart’s Law, the principle that when a measure becomes a target, it ceases to be a good measure. Points-based, and other skills or aptitude-based immigration systems all succumb to the fact that by using a quantitative measure that correlates to success as an immigrant, the relationship breaks down once the rules of the system are known. These together lead to inefficiencies that prevent adequate coping with high volume of movement, and post-migration inefficiencies that pose threats to the mental health and social integration of migrants.
The largest problem, however, is the issue of modern welfare systems and the incentives they send. If new immigrants are eligible for full welfare benefits, this sends a perverse incentive for migrants, as they now have economic benefits not tied with the opportunities or culture of the area. By providing new immigrants with welfare, at the expense of the tax-paying population, political tensions are bound to arise. To resolve this, many states have decided to limit the ability for immigrants to collect welfare, which creates other distortionary pressures as their wages will lack the same purchasing power as those who are able to collect state benefits, disincentivising movement.
The Canadian immigration system features elements of private sponsorship for refugees. Between 2002 and 2012, 50% of privately sponsored refugees reported earnings within 1 year of moving, compared to only 14% of government sponsored ones, which serves to increase their English skills and feelings of social integration. In Europe, where concerns over refugee integration are high, this would provide a practicable solution. Churches and other religious bodies have members of their faithful with concern over the plight of refugees and migrants, and would be willing to bear the costs of caring and their assimilation, which would put the onus on specific groups with properly aligned incentives, and away from the state, which puts the issue in a political context.
A private sponsorship regime is quite flexible in terms of the specifics of sponsorship. One can tweak the specifics of the contract to expand upon the obligations of the sponsor. In cases of divorce, one can ask the citizen-spouse to pay for the costs of the foreign-spouse’s lawyer and divorce proceedings, and any associated welfare costs required during that time. This would alleviate any perceived social burdens that arise from immigration. It should, however, be left to the most local level actor to stipulate more specific concerns beyond crime, as to avoid generalising to areas where those concerns do not apply.
In an ideal world, there would be the opportunity for free movement of people to wherever is in their best interest. Sadly, due to the perverse incentives created by current welfare systems, an open border system would not send out accurate price signals of economic opportunity, distorting the reasons for migration. Private sponsorship regimes sidestep this issue by attaching liability to specific people rather than the state as a whole. This means that new immigrants will not be economically disincentivized by the gap in their access to welfare, as private sponsors are ensuring opportunity, but they will also not have the ability to be a tax burden on anyone other than the willing private sponsor. Localising to individuals, such a private sponsorship system would cut out a lot of the waste associated with current immigration regimes, until a time when welfare reform would allow for freer movement with better incentives.
Originally published by the Institute for Research in Economic and Fiscal Issues.
On January 8th, 2018, former Google employee James Damore filed a discrimination lawsuit against the tech giant. Damore made national headlines last year after he released the Google Memo. In the memo, Damore alleged that Google has shunned ideas that disrupt their leftist narrative. Google fired Damore for drafting this now infamous memo. The lawsuit lists Google's discrimination against white conservative men as a violation of Damore's rights. Despite the outright immorality of Google's anti-freedom bias, James Damore is wrong to sue.
Ultimately, James Damore will only damage freedom if he wins this lawsuit. Assuming the judge sides with him, Damore will only expand the scope of forced association in the United States.
Many who are sympathetic with Damore's views, however, also claim to favor to private property rights. So, any principled response to Google in this matter must stop short of using the state to force Google's hand. While it is perfectly reasonable to boycott and publicly shame Google, it would be a mistake to support James Damore in this lawsuit.
Google Has the Right to DiscriminateWhile the state often infringes upon the right to free association, Google has the natural right to discriminate. In the same way that a Christian baker has the natural right to refuse to cater a gay wedding, so too does Google have the right to discriminate against conservatives, whites, and men. James Damore is correct in saying Google has a bias against conservatives and libertarians, but that does not mean we ought to force Google to hire them.
Google is private property. Therefore, the owners of Google have the right to exclude anyone they wish for any reason. This is a matter of natural law, no matter what a man-made piece of legislation says. This is a classic example of a "Bake the Cake" scenario, and to side with James Damore in this lawsuit is to take a position against private property rights.
A Win For Google Will Set the Precedent for FreedomA short-run win for Google in this case will lead to a short-run and long-run expansion of freedom. Since 1964, the state has forbidden the people from exercising their right to discriminate. While the state generally recognizes the right to association, they seem to outright reject the right to disassociation. Under current conditions, the state will readily force businesses to hire and/or serve people whom they would rather avoid. This is due to the precedent of Public Accommodation the Civil Rights Act of 1964 sets forth.
But, if the courts rule in favor of Google, it will be at least partial victory for a right to disassociate.
Since this result may come with the defeat of James Damore, it is actually a good thing Damore sued Google (assuming he loses, which he probably will). If Damore wins, however, we all lose a little more freedom. Currently, political ideology is not a federally protected class, but a new court precedent barring discrimination on the basis of political beliefs would be a step in a wrong direction.
Overcoming ObjectionsEven Damore's supporters have mixed views on the merits of his lawsuit. While the consensus is that Google had the right to fire him, many are defending Damore's decision to sue. What follows are my answers to the objections set forth by people who hope Damore wins this lawsuit.
One: Google Receives Public Funds, and Should Therefore be Bound by the First AmendmentWhile it is true that Google does receive corporate welfare, this is not an excuse to use the state to regulate Google's behavior. Rather than calling for the state to penalize or fine Google, it is best to instead call for the revocation of Google's corporate welfare (and the elimination of all corporate welfare, for that matter).
Perhaps the most egregious solution to this problem is the nationalization of Google, which some of Damore's defenders are suggesting as an appropriate form of retaliation against Google. While Google does receive corporate welfare, it remains primarily a private company. To hand it over to the government would immensely expand the power of the state.
Two: Since Non-Discrimination Is the Law, It Should Be Universally EnforcedSince the top tax bracket in the US is 37%, should every American be taxed at 37%? Obviously not. Every human being has equal rights, but equal tyranny is not the solution to injustice. Just because the law forbids hiring discrimination, that does not mean it is a good idea to encourage the state to enforce this law. Rather, we ought to compel the state to stop enforcing this law. Although the total abolition of this unjust law is ideal, it is unlikely given the current ideological status quo. The next best option is to encourage exceptions to unjust laws.
On a more extreme note, think of an escaped slave living in the 1850s. Should an abolitionist comply with the Fugitive Slave Act and return the slave to his master? Of course not. While the goal of an abolitionist is the total end of slavery, an abolitionist should celebrate every time someone escapes such an injustice. This is the same logic for every other invasion of liberty. If Google asserts their property rights, good! Suppose the rich get a tax cut, also good! If the poor get a tax cut, awesome!
Three: Since Leftists Support Non-Discrimination, They Should be Forced to Obey ItThis is a bad reason to do anything, and this logic backfires very quickly, especially in politics. If the state forces Google to hire conservatives, it's only a matter of time until they force conservatives and libertarians to hire leftists.
If a leftist company goes after a conservative of libertarian — for instance — for asserting a property-rights ideology, public shaming and self-defense is a much more practical and principled strategy than forcing new hiring practices on that company.
Since James Damore has chosen to attempt to use the state to violate the property rights of Google, principled defenders of private property are forced to defend the rights of the tech giant. At the same time, although Google's rights must be respected in terms of public policy, we ought to condemn them morally.
After all, it is possible to disagree with a person or organization without turning to the state to force them into supporting our own views.
LondonIsOpen is what you are likely to see branded on bus shelters and underground stations if you were to visit London. The slogan represents a major campaign launched by the Mayor of London, Sadiq Khan to show that London is united and open to business, and to the world, following the decision of the people of the United Kingdom to leave the European Union. In fact, in his Mayoral Election campaign in 2016, Sadiq Khan claimed that he would champion and support business and innovation in London. A big part of his pitch — and popularity with Londoners — was that he was an ordinary person (I lost count of how often he reminded us that he was the son of a bus driver), and that he would be on the side of people on modest incomes.
It is therefore with a great deal of surprise and disappointment to learn last week that he supported the decision of Transport for London (TfL) to revoke the license of Uber in London. TfL, which is the public body responsible for providing and regulating transport in London, revoked Uber’s license as they believed that they were not ‘fit and proper’ to operate in London.
This move by TfL is the latest in a long line of attacks on Uber. Previous steps have involved increasing the waiting time for an Uber, and also making Uber drivers sit tests involving questions about the aurora borealis and river pollution. These actions, and now the ban, have all been introduced under the pretense of protecting the public and helping the Uber drivers themselves. This is arrant nonsense.
TfL and Sadiq Khan have argued that because of Uber’s employment practices, and in order to protect the drivers, that Uber should not be able to operate in London. Although I’m sure that being an Uber driver can involve long hours, and is very unlikely to make you a millionaire, it is seen as a viable job opportunity by tens of thousands of people. 40,000 Londoners currently work as Uber drivers, many of them attracted to it as it offers them flexibility and the opportunity to make extra money. The decision taken by TfL will mean that 40,000 people could soon be out of work. Those who are in favour of revoking Uber’s license have argued that the drivers have little security and are not adequately paid and therefore Uber should be banned from operating in London. Perhaps Uber drivers don’t enjoy the same level of security and remuneration as those on full time security, but when the license is revoked at the end of September then they will have no security and no pay. Revoking Uber’s license will destroy the livelihood of 40,000 people.
This idea that revoking Uber’s license is a good thing because it protects drivers is deeply disturbing. It is breathtakingly patronising to suggest that people should not be able to enter into employment contracts with Uber as they might be exploited. Uber drivers are adults who are capable of making their own decisions about how they choose to live their lives. They are more than capable of weighing up the pros and cons of becoming an Uber driver without the State intervening. It is infantilising to treat Uber drivers as though they are unable to make informed choices about who they choose to work for.
The claim that revoking Uber’s license will protect people is also patently absurd. Uber is used by people such as myself as an affordable and safe way to travel home after a night out with friends or after working late. Before Uber arrived in London getting home late at night could be difficult and dangerous. For example, many people faced the choice of wandering around the dark streets of London in order to hail down a black cab in order to pay the very high fares, or walking home- a decision which could result in becoming a victim of crime. Therefore, countless Londoners have enjoyed being able to use an app to order an Uber to take them to where they needed to go, in the comfort of knowing that there was a record of the journey and that the fare would be reasonable and fixed in advance. Revoking Uber’s license will mean that many Londoners- and especially women- will now face an increased risk of becoming victims of crime (including rape and sexual assault) if they can not afford the fares of black cabs or feel comfortable using them.
This, again, is disturbing in how it patronises and infantilises people. Revoking Uber’s license removes Londoners’ freedom of choice. They should be free to make their own choices about which form of transport to take. TfL’s decision drastically limits their choice.
However, it is not only patronising to passengers, but it will also make them poorer. One of the reasons why Uber is so popular is because it is much cheaper than the alternative of taking a black cab. TfL’s decision has removed one of the black cab’s biggest competitors meaning that they will be able to increase their prices even further. This will result in Londoners having even less money to save or to spend on other things.
TfL and Sadiq Khan claim that they are looking out for Uber drivers and Londoners. In fact, they have caved into pressure from the powerful black cab lobby and the trade unions which are some of Mr Khan’s biggest supporters. The black cab lobby and the trade unions do not care about Londoners or Uber drivers, rather they act like a cartel whose only care about their own wages. They have used their powerful influence to pressure TfL and the Mayor of London to incapacitate their biggest rival in order to re-establish their monopoly in London.
The decision taken by TfL has nothing to do with protecting the people of London. It has caved into pressure from a powerful set of special interests operating like a cartel. The result will be 40,000 drivers out of work and millions of Londoners who are poorer and less safe.
In Hans Hermann Hoppe’s original and controversial essay “The Case For Free Trade and Restricted Immigration,” he outlined a defense of state action for the restriction of immigration according to certain, specific qualifications. Of particular note is his invitation proviso, in which he argues that so long as a state exists, it is responsible for protecting the person and property of its citizens, and restricting immigration to only those migrants who have an “invitation” — most likely in the form of a contractual agreement for employment or property rental.
Hoppe’s position is, in its simplest form, that a per se right of migration does not exist. Instead, what right can be derived from the principles of private property “is the freedom of independent private property owners to admit or exclude others from their own property in accordance with their own restricted or unrestricted property titles” (emphasis mine). The role of the state, failing the preferable “corrective solution” of the privatization of public lands and the decentralization of the government, is to enforce this prerogative of private property owners. Hoppe calls this the “preventative solution” to immigration.
As the debate over the right to restrict immigration has blown up in the libertarian community, the focus from all sides has almost exclusively been on the matter of preventing potential migrants. But this means overlooking the corollary point of Hoppe’s argument, which is the right of property owners to admit migrants, by hiring them or renting them a home or through some other valid exercise of their own private property rights.
With this in mind, it is interesting to note that many of the United States immigration policies have violated Hoppe’s invitation proviso by preventing the legitimate migration of foreigners who were able to voluntarily enter into labor contracts with American businesses.
The first sweeping immigration law in the US was the Chinese Exclusion Act of 1882. This law was a reaction to the growing anti-Chinese sentiment that was erupting throughout the country, particularly in the West. The anti-Chinese and anti-immigration movement followed the predicable evolution of domestic workers growing increasingly disgruntled at having to compete with foreigners for jobs.
But although many of the early Chinese settlers might have violated the invitation proviso (though the principle of original appropriation, which has been consistently violated by government territorial claims, would have justified many of the early California settlers anyway), thousands of the Chinese workers that Americans were reacting to did meet Hoppe’s requirements.
When the Central Pacific Railroad was having trouble maintaining its labor force, it reluctantly hired fifty Chinese workers from California. After proving themselves to be productive workers — and because Chinese laborers were willing to accept lower wages than whites — the Central Pacific started recruiting laborers directly from China. To do this, it offered contracts to Chinese men prior to their migration into the United States, and the provisions of the contract often assumed responsibility for the cost of transport, usually in the form of loans that made the Chinese liable for a certain period of work to cover the cost.
Despite the anger this aroused among naturalized citizens, these labor contracts unequivocally met the standard Hoppe outlines with his invitation proviso. The result was the migration of well over 10,000 Chinese through voluntary labor agreements.
These contracts were not exclusive offered to the Chinese, either. Other businesses commonly advertised for contract labor, especially in eastern European countries. Often, these contracts were facilitated by middle-man agencies that traveled to Europe or Asia, negotiated contracts between the potential laborer and the American business, and then facilitated passage into the country.
Labor Unions spearheaded the movement against these voluntary arrangements because, along with the typical racist sentiments that were prevalent in the nineteenth century, foreign workers were seen as less likely to agree to pay union dues. Thus, immigration restrictions began to gain steam in the 1880’s and after.
While there was a mixture of immigrants who came prior to having a Hoppean “invitation” and those who met this requirement, it is undeniably evident that the immigration laws passed by the US, according to Hoppe’s immigration arguments, violated the private property rights of many business owners who were thus prohibited from voluntarily entering into labor contracts with foreign workers.
Immigration laws have continued to violate the right of private citizens to admit immigrations according to the invitation proviso into the present day. During the Syrian refugee crises, Tho Bishop noted similar instances of immigration laws interfering with the rights of private citizens to financially sponsor Syrian immigrants by providing them with shelter and living expenses for up to a year. This, of course, is equally consistent with Hoppe’s invitation proviso, but it was made illegal by statutory law.
Hoppe’s immigration theories continue to be a matter of controversy among libertarian theorists. But regardless of whether or not one subscribes to Hoppe’s ideas, it is important to put his theories in proper context. This means that it is necessary to recognize the cases in which the government, according to Hoppe, would be justified in restricting certain immigrants on behalf of property owners, but one must not forget that private property owners retain the ultimate right to admit migrants on a voluntary basis as an extension of their legitimate property rights.
Minimum wage laws are often put forward as regulations that help everyone. If anyone is hurt, it is wealthy capitalists who can afford to lose a little money. Unfortunately, this is rarely the reality. In order to decode the impact of minimum wage laws, one has to examine the effects on multiple levels, examining both the seen and the unseen consequences. Increases in wages have to be paid for somehow, and given the interdependent relationship of a market, there are three major players who are impacted by minimum wages: employers, employees, and the consumers.
- EmployersEmployers are faced with the increased costs of the factors of production without any corresponding increase in value. Although minimum wages are argued by pointing at multinational companies and the profits they are raking in, MacDonald’s and Wal-Mart are not the only ones paying minimum wages. Indeed, they are the least affected, since their enormous profits enable them to cope with the increase in wages.
It is the small emerging businesses that are harmed the most, the local businesses that provide employment in their neighborhood to people who would have otherwise remained unemployed. Minimum wages punish small time entrepreneurs by decreased profits — especially when profit margins are razor thin, as is usually the case. This fact helps to deter entrepreneurs from opening businesses, and this is doubly unfortunate when we consider the fact that minimum wages are often a legislative reaction to an excess labor supply in the first place. When wages are low is precisely the time when we need new entrepreneurs the most.
RELATED: "The Minimum Wage: Taking Away the Right to Work" by Roy Cordato
Moreover, these wage increases do not take into account the opportunity cost, i.e., the cost of the next best option. The higher the minimum wages, the more lucrative other options such as automation appear.
- Employees For the employees, the most frequent repercussions are reduced work hours or loss of job. Neither helps in increasing the total wage of the employee, reminding proponents that good intentions do not translate into good outcomes.
Furthermore, minimum wages encourage employers to discriminate against lower skilled people, as evidenced in the gigantic increase in teenage unemployment under minimum wage laws. Indeed, this was once common knowledge, which is why racists once encouraged the implementation of minimum wage laws as a way to exclude lower-skilled non-white workers from the marketplace.
RELATED: "No, There’s No Economic Case for the Minimum Wage" by Per Bylund
Today, minimum wage laws are often advocated with the intent of increasing wages for groups of unskilled workers. Unfortunately, the results are the same now as they were when the laws were imposed to exclude workers.
Thomas Sowell explains further in Basic Economics:
Unemployment among 16 and 17-year-old black males was no higher than among white males of the same age in 1948. It was only after a series of minimum wage escalations began that black male teenage unemployment rates not only skyrocketed but became more than double the unemployment rates among white male teenagers. By 1954, black unemployment rates were double those of whites and have continued to be at that level or higher.
The real impact of the minimum wage, therefore, is to make it illegal for lower skilled people to be employed, as is the case with black unemployment.
- ConsumersThe impact of minimum wage laws on the consumer is felt through an increase in prices, as firms attempt to recover some of their raised production costs. Since employees are also consumers, they are to be impacted by the boost in prices, which reduces what their money can actually buy. Price increases that accompany minimum wage hikes thus lower the real wages of those who are lucky enough to keep their jobs as new minimums are imposed.
Moreover, as minimum wages force cash-strapped small business out of business, consumers enjoy fewer choices.
Aside from these disadvantages listed above, there exists yet another drawback: Wages indicate to workers the value of work in various fields. Low wages would ordinarily convey to a worker that it may be best to avoid work in low-wage areas, and seek employment elsewhere. However, when wages for a service do not decrease with a decrease in value for that service, the deterrent (in the form of lower wages) is not present to redirect the resource to better-valued uses. If, as certain people claim, minimum wages are insufficient to meet the needs of workers, then workers ought to shift to a different profession.
By manipulating minimum wages, however, employees cannot avail themselves of the price signals offered to workers by wages — wages are, after all, the price of labor. Workers are then less able to determine what industries and fields already have too many workers, and which fields have too few.
The result is the same whenever governments intervene and distort markets and pricing: misallocation, malinvestment, and impoverishment.
The Federal Reserve’s decades long program of inflation, as the cure to fix all things wrong with economy, has made retirement a luxury fewer people can afford. It’s not a story that’s well known. That the retail world is being taken over by Jeff Bezos’s Amazon is common knowledge.
The two trends crash together in Jessica Bruder’s Nomadland, a book gushed about by reviewers at The New York Times. Bruder said at the Wisconsin Book Festival, “the economy is a mess,” and goes on to rail against greedy employers who don’t want to pay benefits and fund retirement funds.
Bruder’s book is chalk full of sad stories of layoffs, foreclosures, and lack of family support. At the same time, these nomads, workampers or rubber tramps, are a resilient bunch, who left behind the costs and responsibilities of real estate for “wheelestate” to survive their golden years.
This is where Mr. Bezos comes in. Amazon is a large employer of the workampers. “Incentivized by federal tax credits for employing elderly workers (25 to 40 percent of wages), the company aggressively recruits them, especially during the holiday season,” Parul Sengal writes for The New York Times. “Jeff Bezos has predicted that a quarter of all workampers will pass through his warehouses, working 10 hours or more a day, sorting packages.”
Not having the luxury of financial security and leisure time to play golf and bridge, “workampers ride a national circuit of jobs extending coast to coast and up into Canada, a shadow economy created by hundreds of employers posting classified ads on websites with names like Workers on Wheels and Workamper News,” writes Bruder.
The fact is, employers are eager to hire workampers. “They love retirees because we’re dependable. We’ll show up, work hard, and are basically slave labor,” seventy-seven year old David Roderick told the author.
The author lived in a van (named Halen) and traveled with the workampers for three and a half years. The people she befriended were cheerful and gracious, even after working grueling shifts at Amazon warehouses that could involve walking 15 miles punctuated with dozens of squats. A couple Advil, taken before and after work, are a must.
However, few dream of living in an RV Park, working for Mr. Bezos, then moving on to work for a forest service contractor, and then toiling in the pressure-packed, beat-the-clock, sugar beet harvest.
Contrary to how Bruder portrays it, this is not a minimum wage issue. Government provides employers incentives to hire temporary workers so as avoid paying margin killing benefits. The author doesn’t finger Uncle Sam for working these wanna-be retirees to the bone and shorting them on their hours, even in national parks. She saves her bile for the evil Amazon.
“Many of the workers I met in the Amazon camps were part of a demographic that in recent years has grown with alarming speed: downwardly mobile older Americans,” writes Bruder. "In the heyday of a place like Empire — the era of a strong middle class, complete with job stability and pensions — their circumstances had been virtually unimaginable.”
Yes, successive generations are now doing worse, as government has become an over leveraged leviathan. However, people don’t just curl and die, they persevere, with a smile. The author cites a wonderful quote from James Rorty who wrote during the Great Depression, “I encountered nothing in 15,000 miles of travel that disgusted and appalled me so much as this American addiction to make-believe.”
While Americans put on a happy face, central bank inflation robs people at the bottom and transfers wealth to those at the top. “Creating money out of thin air, which is what central banks and commercial banks are licensed to do, confers purchasing power on those who are able to use the money first,” writes Russell Lamberti. “For this new money to obtain purchasing power, it must rob little bits of purchasing power from all the other money in the economy. Purchasing power is transferred from those who hold money to those who create new money at close to zero marginal cost.”
Lamberti continues,
This explains how and why wealthy, creditworthy asset owners get richer while many poor people tend to resort to overconsumption and ultimately get poorer. Economist John Maynard Keynes, ironically a proponent of inflationary policies, famously noted that “by a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of their citizens.
Ms. Bruder believes this is just the beginning. Most who fall on hard times won’t move into their vehicles. However, “Those who do are analogous to what biologists call an ‘indicator species’--sensitive organisms with the capacity to signal much larger shifts in an ecosystem.”
The disease is inflation, workamping is a symptom.
Since Trump’s reduction of the corporate tax to 21%, workers across the country have been rejoicing. Companies like Wal-Mart, Apple, Bank of America, and many more have announced firm wide bonuses and minimum wage raises. To most, the tax cuts appear to be a clear success. However, some commentators, such as Dr. Veronique de Rugy at Reason, are saying not so fast.
Dr. de Rugy claims that these announcements are not in line with economic theory. For wages to be affected by tax cuts takes an extended period of time. The newly freed revenue must be accumulated and invested into new capital equipment which boosts worker productivity and, consequently, their wages. Quite simply, Dr. de Rugy suggests that the tax cuts simply have not been in place long enough to be held directly responsible for these announcements, and she even ponders if they are nothing more than PR moves.
In truth, these bonuses and raises are perfectly in line with what economic theory predicts.
How Wages Are DeterminedWages are equivalent to the expected increase in revenue an individual’s labor generates for the business, or, equivalently, the amount which is expected to be lost if his or her labor went unemployed.
For example, imagine a restaurant employs 5 cooks who are capable of serving C number of customers per hour, earning E dollars in revenue. One cook wins the lottery and retires to the Bahamas, and now the restaurant is only capable of serving C-L customers, and consequently only earns X in revenue. Clearly, entrepreneurs will only be willing to pay the difference between E and X, a number which will be called W, to employ a fifth cook. W is what economists refer to as the marginal revenue product, and, thanks to competition in the labor market, wages tend towards this number in a free market, less a discount for time preference.
To see how taxation effects wages, imagine if every time the restaurant owner goes to deposit his firm’s earnings an armed robber stole 35% of the firm’s net income. Disregarding momentarily what that thief does with his loot, whether he builds roads or funds a study of cocaine’s effects on the promiscuity of Japanese quail, the moment the robbery occurs, the restaurant is making less money than before. It immediately renders the firm less efficient, and the money to be imputed back to the factors of production, including workers, is immediately smaller.A situation is conceivable in which the demand for the restaurant’s food is such that it’s customers are willing to pay enough to cover the costs of the robbery, but this scenario would only mean that demand for other goods must fall accordingly, with the corresponding fall in factor values. Put another way: the revenue the firm can keep has now gone down, meaning revenue per employee goes down. This pushes wages down, even though, in a free market, the firm would have been willing to pay employees more.
After some time, a new, more “charitable” thief replaces the former and decides to only steal 21% of the restaurant’s net income. Part of the cost of the crime has been reduced, and this will have the same effect as a reduction in any other cost. While wages won’t return to their levels before the robberies began, they will rise, because the worker’s labor has become more productive the moment the reduction in theft occurs. Moreover, the firms expectations of revenue will rise, potentially leading to higher wages.
If one replaces the word theft with tax, and the restaurant with corporate America, one can see clearly that the rise in wages is clearly in line with standard economic analysis. While it is true that a reduction in corporate taxes will enable greater investment in capital goods, this phenomena is separate from the one that is primarily at work presently. Reducing the burden of government on the private sector has both immediate and long run benefits for workers and capitalists alike, and Trump’s tax reform is evidence of this.
Tax Cuts are Good, But We Need Spending Cuts TooMore action is needed for the benefits of this reform to stick. So long as there is deficit spending enabled by money printing at a central bank, government spending must also be reduced to lessen the effects of the inflation tax.
Returning to our example, imagine the thief does not desire to reduce his expenditures below his current levels despite stealing less. Indeed, our thief has developed the ability to perfectly counterfeit his local economy’s currency, deceiving everyone who receives it. The tangible effects will be similar to his blatant theft. The price of goods will rise in such away as to nullify nominal increases in wages, but not before real tangible wealth has been transferred to the thief and the first receivers of the new money respectively.
Alternatively, perhaps if the thief fears the community catching on to his counterfeiting scheme, he could seek to borrow the money from the community’s financiers. The financiers would be happy to oblige, because he can clearly demonstrate that he has a large and incomparably reliable source of income. In this case, the thief would be able to maintain his current expenditure levels, but at the expense of growth within the economy. Sooner or later, the thief’s debt must come due, and to meet it without a drop in his expenditures, his only recourse will be to either steal a greater amount of money from the restaurant or turn on his printing press.
The lesson is clear. If Congress and the Trump administration wish to see the welfare of the American people rise in a permanent fashion, they should follow their tax cuts with cuts in spending.
There is an old lawyering adage that says “If the law is on your side, pound the law. If the facts are on your side, pound the facts. If neither is on your side, pound the table.” It also has an alternate ending which says, “When neither is on your side, pound your opponent.”
This adage could be restated as: When you have a good argument, make it well; when you don’t have a good argument, find a way to shift the focus elsewhere, whether it involves various distractions or ad hominem attacks. That latter strategy is also illustrated by air combat. When your opponent has your number and a missile is on the way at you, you dump chaff to confuse and misdirect the missile from you.
If you had a good, logical argument, you wouldn’t want to undermine its power to persuade by adding recognizably bogus arguments to your case. Adding such claims to lengthen the list of claimed arguments does not increase the power of any valid argument, but bundling a good argument with bad arguments can reduce the credence attached to the good one.
When this happens, it is likely that either the arguer doesn’t know that the added argument is faulty. Or, their intent is to win by any means, including intentional misrepresentation.
However, when you have a bad argument, trying to shift discussion elsewhere is quite likely. It is one possible way to win, despite a losing logical case.
The US Supreme Court is now considering the case of Janus v. American Federation of State, County and Municipal Employees (AFSCME) in which state employee Mark Janus objects to paying mandatory "fair-share" fees to the Union, even though he is not a member of the union. These fees required of non-members are allegedly there to compensate unions for the costs of negotiating on the behalf of non-members. (How much of unions’ costs go to that rather than politics is largely left up to the unions, who can easily twist cost allocation to minimize the fraction counted as politicking.)
The case provides a good example of a distract-and-confuse strategy being used by a party with a weak case.
Common Pro-Union Arguments That Are Drawing Increased SkepticismAs people have paid closer attention, several mainstay union arguments used to claim unions advance the “general welfare” have increasingly been found wanting. Claims that their efforts raise everyone’s wages, including non-members, are precisely the opposite of the truth. Unions ignore the differences between unions that could theoretically be voluntary associations and the reality of coercive unionization in fact. Their freedom-of-association assertions are used to actually deny many workers their freedom of association, and many union members have never actually cast a vote for their union, bringing even their freedom of association claims for union members into serious question. Further, the free-rider problem they claim justifies mandatory agency fees for representing all workers is actually caused by union choices, and is often used to make many workers forced riders who are harmed by their union rather than free riders who benefit at unions’ expense.
With so many union arguments increasingly recognized as faulty, including by several Supreme Court justices, union spokesmen and political favorites took part in dumping chaff that had nothing to do with the Constitutional issues that supposedly were to determine the case. And their willingness to do so reveals that they recognize they have a bad case for mandatory agency fees for non-members, and their best hope is that something else could swing the vote of one Justice to join the four reliably liberal votes, and uphold the Abood precedent by which mandatory agency fees are currently maintained.
New "Arguments"In oral argument, the lawyer for the State of Illinois said mandatory agency fees were necessary because if some members stopped paying, raising others’ dues, unions “tend to become more militant, more confrontational.” This is hardly a Constitutional argument. Similarly, New York Mayor Blasio’s administration said that overturning Abood would result in “paralyzing public sector strikes” This is reminiscent of union Project Labor Agreements, in which unions are given control of a project’s workforce in exchange for the promise not to strike, which punishes nonunion workers who would not strike, in order to buy labor peace from unions who threaten strikes, penalizing the innocent to deter the guilty, who are actually rewarded. And both the plaintiff and some earlier courts have recognized that for the extortion it is.
Mandatory agency fee supporters at the Washington Post Editorial Board have further argued that a decision against Abood and the union would be viewed as proof that the current Supreme Court is no longer independent of politics, but now partisan for the other side, and suggested a “compromise” that would save Abood. Of course, such arguments only arise when rulings that the left prefers are threatened; when left-favored rulings undermine the Constitution or prior precedents, they have no objections to that partisanship. They also dragged out stare decisis (it stands decided) on their side, thus attempting to claim that the court should blindly defer to existing precedents. Again, this is only done when there is a threat to undo earlier changed interpretations they liked and hope to preserve as precedents; never for their “innovations,” which similarly violated stare decisis without their objections. Still further, the Washington Post claimed an anti-Abood ruling would cause a “fiscal crisis” in underfunded health care promises for retirees. That is, rich benefits created for unions in combination with “public servants” whose burdens to taxpayers would not show up until after they left politics require that union power be retained because earlier unwarranted exercises of union power would be too costly otherwise.
The Janus case is a good example of defending bad arguments, following a long line of earlier bogus union claims. They and their allies dump all sorts of irrelevant chaff in search of extra-Constitutional excuses when it becomes clear they are likely to lose their case because, beyond “more for me” desires by those who benefit from preferential treatment, it is so weak. And at its heart, the preferential treatment is just government coercive power delegated to unions, which has no place in a land which Americans could call the “land of the free,” without blatant contradiction.
There is growing concern across the globe that automation will lead us to a dystopian future. With robots becoming ubiquitous in every aspect of our lives, the marketplace will be filled with cheap goods, but the consuming population can’t acquire them because they don’t have a job. It is a legitimate worry for millions of people, especially when you see the countless videos and news articles about a robot flipping burgers, automated arms packaging goods inside a factory, and grocery stores without cashiers.
One of the latest doom-and-gloom alarmists is the Wisconsin chapter of the AFL-CIO, which is griping about self-serve checkouts. Do unions ever do anything productive?
Last week, the labor union went to Facebook to demand its followers to “never self checkout.” The organization whined that it doesn’t want to assist corporations in firing employees just so they can boost their bottom lines.
It’s not convenient for me to help corporations fire workers so they raise their profits. I stand in line and when the lines back up, the store calls more cashiers to the front. If we keep doing it, they’ll need to hire more people. NEVER SELF CHECKOUT.
If life were only that simple.
Why hasn’t the group requested similar action for ATMs? If you avoid the bank machine and stand in line waiting for the bank teller, then the financial institution will simply hire more people. This logic, or lack thereof, can be applied to a myriad of other automated services that we enjoy today: ecommerce, digital cameras, search engines, and so much more.
But nobody is calling for an end to Google or Bing so the yellow book can be made great again. The AFL-CIO isn’t telling members to ditch mobile devices so telegrams can make a comeback.
What the labor group is conveying to the world is that it hates progress.
Automation will Benefit our Lives Earlier this year, many Oregonians made headlines because they were complaining that a new law will allow residents in rural communities to pump their own gas. There were multiple grievances, but one of the main objections was the reduction in the number of attendants.
In 2016, up in Canada, the CBC spoke to a retiree, Bonnie Banks, who bothers people at self-serve checkouts, asking them if they “like working for Walmart for free.” She was upset that she now pumps her own gas and puts her own trash in the garbage at fast-food restaurants.
In the age of automation, there are many occupations and industries that will become obsolete. They will inevitably enter the dust bins of history.
The automobile eliminated the horse and buggy industry. The refrigerator rid the world of icemen and milkmen. Advancements in telecommunications abolished telephone operating jobs. Ride-sharing services have brought the government-protected taxi industry to its knees.
Are we any worse off than we were before? If you ask the average young person 70 years ago, he or she would admit that they cannot get along without the icebox and local telegram office. If you query the average young person today, he or she will concede they cannot live life without an iPhone or Uber.
Times change. New businesses rise. Old industries fall.
$15 Minimum Wage Is Ramping Up Automation If you think that businesses are suddenly investing a lot more into automation, you’d be correct.
With the Fight for $15 crowd holding demonstrations, staging walkouts, and encouraging lawmakers to raise the minimum wage, companies are reacting by automating operations.
As McDonald’s installs self-serve kiosks or mom-and-pop diners have robots in the kitchen, there is less of a demand for human cashiers and cooks. As Wal-Mart adopts self-serve checkouts, they don’t need too many cashiers on the front lines.
And you can blame entities like the AFL-CIO for the rampant rise of automation.
It is mostly immigrants, young, unskilled, and uneducated people who hold minimum wage jobs. Without these entry-level positions, thanks to the $15 fight, they can’t enhance their human capital.
New Opportunities Pop Up In today’s world, where socialism is becoming trendy, there is a misconception that the free enterprise system is a zero-sum game — somebody wins, somebody loses. In other words, according to the left, you only become prosperous if you steal from others. Warren Buffett or Jeff Bezos get the entire pie while everyone is left with crumbs.
Nonsense. This is hardly the case in the free market.
When Microsoft was established, Bill Gates created more pies. When the iPhone was created, Steve Jobs produced more pies. When Karl Benz invented the automobile, he baked pies for the entire world.
With automation seeping into every single part of society, new opportunities will pop up. If scores of positions become antiquated, the individuals holding these jobs will do one of three things:
Enhance their human capital by learning new skills.Fill the demand for labor in other industries.Perform other roles or tasks in the company. This is what tellers have done in the banking sector. Many branches simply transferred tellers into other important roles, such as marketing and investment advising. Ditto for business publications. Thanks to the advent of software that composes articles from news releases or corporate earnings reports, reporters can now spend more of their time on investigative journalism, interviews, and much more.
Once the car was prevalent, carriage makers didn’t raise the white flag. They either adapted to the changing conditions or applied their craft to something else.
You will always come across people like Bonnie Banks moaning about self-serve checkouts. You can stop these busybodies in their tracks by doing a couple of things: point out their hypocrisy since they likely use ATMs or the computer and provide them with a lesson in Econ 101.
The future is now, and we shouldn’t be apprehensive of its arrival. We’re all getting richer and leading happier lives because of technology. Let’s embrace it.
Originally published by LibertyNation.
“As the owner, I’m looking at it big picture and long term.” Those are the words of Eric Mason, owner of a Chick-fil-A in Sacramento, CA.
Mason was talking about his employees and sales. He believes successful restaurants are an effect of happy, well-paid workers. That’s why he’s offering his employees wage increases that would boost their pay from $12-13/hr. to $17-18/hr.
That Mason is raising worker pay well beyond California’s minimum wage is a reminder that pundits on the left are flying blind when they emote about stagnant wages. They could learn a lot from Mason. Mason sees very clearly what they don’t: low-wage workers are incredibly expensive.
They are because they’re not very productive. As is frequently said, you get what you pay for. Low-wage workers don’t need to perform very well simply because they’re not being compensated for it. Mason wants his business to boom, which means he wants his employees to feel well rewarded. Quoted in the Washington Post about his decision to boost employee compensation, Mason said “[W]hat that [pay well above the minimum wage] does for the business is provide consistency, someone that has relationships with our guests, and it’s going to be building a long-term culture.”
“Long term culture” is crucial here. Mason’s point is that employee turnover is very costly. Not only is it time consuming to train workers who will soon depart, it’s also bad for the business. People patronize restaurants for all sorts of reasons. Consistency in terms of food and service, and a welcoming atmosphere plainly factor. Each quality is more likely to be found in restaurants that retain their employees for the long term.
The above speaks loudly to how expensive it is to underpay. To do so, as in to presume to exploit, is to drive away the workers who are capable of mastering the menu, creating a “long term culture,” and who will know many customers by name and order.
Mason’s insight is as old as profit is. Henry Ford understood long ago what Mason does now. Poorly paid workers are a business-sapping burden. Ford didn’t give his employees raises so that they would buy Ford cars; rather he offered them impressive raises because annual turnover of over 300% was limiting his ability to profit. Low wages were costing Ford’s eponymous company a great deal. Mason wants to avoid the high cost of short-changing his employees.
Mason’s actions belie the popular lefty belief that businesses thrive by paying their workers as little as possible. He’s a wise owner for sure, but can those who think businesses grow through exploitation really believe that Mason’s view about compensation is a minority one? More realistically, well-run corporations of varying shapes and sizes well understand that businesses succeed thanks to the people who show up for work each day. Successful owners and CEOs understand that parsimony is not the path to profits.
Profitable businesses get that way by overpaying. Does anyone remember General Electric’s nickname when it was the premiere U.S. blue chip in the late 1990s? “Generous Electric” employees were exceedingly well compensated, and then it was said about Time Warner around the same time that it retained its workers with “golden handcuffs.” So fearful was it of losing its human capital to Silicon Valley upstarts, Goldman Sachs handed out generous stock bonuses during the original internet boom. More modernly, readers need only consider Amazon. It’s one of the five most valuable companies in the world. Not surprisingly, the pay at Amazon is very impressive. Anyone who doubts this need only consider the feverish competition among North American cities for the Seattle giant’s second HQ.
Are the previous examples too large and too corporate? Too coastal, or too outlier? Too college-degree focused? If so, fine. Consider the plumbing industry. In a front page Wall Street Journal story from last week, it was reported that Ft. Collins-based Neuworks Mechanical is offering plumbers “on-site tap flows with craft beer”, roasted espresso, a smoker for brisket lunches, and next up, a yoga studio. A plumbing company in St. Paul offers arcade games and a “quiet room,” while another plumbing outfit unearthed by the Journal provides its workers with massages and spa treatments.
Which brings us to the myth about stagnant pay in the U.S. Really? If pay were stagnant, does anyone think businesses would be paying so much and offering so much in order to win and retain workers? No doubt some owners and CEOs are quite simply enlightened and realize that a happy work force means happy customers, but to some degree this bidding war for workers is the result of a scramble for talent among all businesses.
Stagnant pay presumes a lack of economic growth, and a dearth of successful businesses. Except that that U.S. has had some of the greatest growth since the early 1980s, and it houses a majority of the world’s most valuable companies. In an economy reliant on people, it’s only natural that the people staffing U.S. businesses are being paid more and more, and being compensated in ways that are more and more creative. So impressive is compensation in the U.S. that even fast food businesses must pay up to compete. Indeed, as the Chick-fil-A story reminds us, it’s not just Starbucks that is going out of its way to retain workers with pay and perks.
So while many on the left surely want the best for workers, far too many labor under the false illusion that businesses strive to minimize employee costs. Not at all. They can’t afford to. They strive to overpay because a failure to retain employees is the path to decline.
Article was originally published on Real Clear Markets
I’m not worried about artificial intelligence, I’m terrified of human stupidity.
The debate about technology and its role in society that we need to have is being used to deceive citizens and scare them about the future so they accept to submit to politicians who cannot nor will protect us from the challenges of robotization.
However, there are many studies that tell us that in 50 years the vast majority of work will be done by robots. What can we do?
We have lived the fallacies of dystopian estimates for decades.
I always explain to my students that, if we believed the fifty-year-forward studies of the past, it has been seventeen years since we have run out of water, oil, and jobs. Fifty-year estimates always suffer from the same mistakes. First, presentism. Take the current situation and exaggerate it. Second, sweeten the past. No, no past time was better. Third, always estimate an impossible and negative future by ignoring the evidence of human ingenuity and innovation.
The reality is that today, the world population has grown to 7.5 billion, and we have more work despite the technology revolution. Global unemployment is at historic lows, 5%, global poverty has fallen to unprecedented levels, from 80% in 1820 to 10% today. Infant mortality has been reduced to less than half, from 64.8 deaths per thousand births in 1990 to 30.5 in 2016.
We have plenty of natural resources, proven oil reserves have grown and we have more diversified sources of supply. All this has happened with -and thanks to- the greatest technological revolution ever seen.
More than half of the jobs that exist today were not even known twenty years ago. The empirical demonstration is that data from more than 140 years shows that technology creates much more employment than it destroys and that it is a lie that low-skilled jobs disappear forever. Others are created. A study by Ian Stewart, Debapratim De, and Alex Cole shows clearly that technology displaces the most boring, dangerous and hard jobs, that is, those that we do not want anyway, and creates many more jobs in service sectors, human knowledge, and interaction.
In fact, Deloitte studies, Ernst / Young, and others also foresee that we will need many more jobs in the future in support tasks and services adjacent to the new technology activities. What the prophets of doom always forget is that as long as the customer is human, the experience and interaction with other humans is not reduced. It increases.
The most robotized societies do not suffer more unemployment, they have much less. According to data from the OECD of 2016, South Korea, Singapore, Japan, and Germany have the highest rates of robotization of work functions (530, 400, 305 and 301 robots per 1,000 employees respectively) and unemployment is less than 3.9%. Meanwhile, countries that subsidize low-productivity sectors and place the State as a “protective” agent have higher unemployment rates. France, which has less than half the robots of South Korea or Singapore (127 per thousand employees), has almost a three times higher unemployment rate than highly robotized countries. Spain has less still, 60% fewer robots than the leaders, and five times higher unemployment rate. McKinsey estimates that almost half of the competitiveness gain of the next 50 years will be explained by digitization and automation. This means higher salaries in all sectors, even lower-skilled labor.
I am sure that, as in the past, those estimates will fall short, both in the improvement of productivity and quality of life and in the advance of creative robotization. It will create many more and better jobs. Even for the sectors with low qualification, because they move to services and support.
The most representative companies in this phenomenon are denominated under the union of their initials: FAANG (Facebook, Amazon, Apple, Netflix, and Google). The spectacular development of these companies has not reduced employment. Unemployment in the United States has been reduced to the lowest level since 1968 while the companies that were supposed to lose due to technological progress have been strengthened by having to compete.
In the world, unemployment has continued to decline despite the fact that these companies were growing to be 27% of the joint capitalization of the US S&P 500, with business models that have created services and jobs that did not exist only a few decades ago. These companies have created many more indirect jobs than they have “destroyed.”
The excuse of “what happens with less qualified jobs?” hides the fallacy of interventionism.
Protectionism, subsidies, and welfare assistance neither protect nor create those positions in obsolescent sectors. The way to adapt low-skilled workers to technology is with training, but real training, at work. Technology has created up to 40% more unskilled jobs in addition to those it destroys, as we have seen in California, Texas, or Illinois and in Asian countries.
A first positive impact on the use of digitalization is caused directly by these companies, which together employ more than 800,000 people worldwide, with a productivity level that is clearly superior to the companies in traditional sectors, and with better salaries.
Companies like Facebook and Google have more than 27,000 and 88,000 workers on their payroll, respectively, and pay more than 50% on top of the average salary of industrial sectors. Their business model is based mainly on advertising in digital media, a market that did not exist until a few years ago. Another 115,000 net creation of jobs came from new technologies in the US. Amazon, meanwhile, with a 44% share in the e-commerce market, is one of the main groups responsible for the creation of the more than 400,000 jobs generated by e-commerce companies in the United States, according to Michael Mandel. In addition, in the case of this company, the impact has to be extended to sectors close to electronic commerce, such as logistics, parcels, electronic payments, etc.
In Asia, a continent where robotization is a usual element in companies and production methods, they already know the positive effects of this phenomenon. According to the Asian Development Bank, the greater economic dynamism generated by robotization in 12 Asian developing economies between 2005 and 2015 has compensated for the destruction of employment derived from the implementation of automation processes and has created more additional employment. This transformation has led to the creation of 134 million jobs a year, a figure clearly higher than the 104 million jobs a year “transformed” by the substitution effect of labor due to automated processes. Between 43% and 57% of the new jobs created in India, Malaysia, and the Philippines during the last 10 years come from the technology sector. But the most important thing is that the increase in employment in services, tourism, hotels and adjacent sectors has doubled.
Never bet against human ingenuity. The greatest enemy of the prophets of the apocalypse is an engineer.
Originally published at dlacalle.com
It is a credit to the economics profession that the labor theory of value has largely fallen out of style. There is, however, one sector of the economy in which it continues to be taken seriously: sports.
More: College Athletes Aren't What Makes College Football Profitable by Tho Bishop
The latest example of this economic fallacy emerged when A’ja Wilson of the WNBA’s Las Vegas Aces took to Twitter to poke LeBron James’s new contract with the Los Angeles Lakers. “154M. must.be. nice,” wrote Wilson. “We over here looking for a [million] but Lord, let me get back in my lane.” When she received push back on comparing her value to one of the greatest players of all time, she responded “Ohh, it’s about skill set? [B]ecause I heard a bench player gets paid more than … nvm.”
In her defense, Wilson is a 21-year-old athlete who probably hasn’t thought a great deal about economics. It’s understandable for someone in her position to be envious of the paychecks earned in major professional sports leagues. Unfortunately Wilson’s thoughts reflect a growing trend of sports commentary looking at the plight of the “underpaid” WNBA player. Lisa Borders, president of the WNBA, has even directly pointed to sexism as a driving reason for the discrepancies between the earnings of male and female players.
Of course, the real issue has nothing to do with sexism and everything to do with the fact that the WNBA simply isn’t very popular with Americans.
For example, last month the WNBA averaged 250,000 viewers per game with a high of 378,000. Relative to the history of the league, this was an extraordinary success, up 39% from last year. By comparison, last year’s Professional Bowling League averaged 650,000 viewers for ESPN.It’s notable to point out that the top PBA salary is roughly twice the amount of the average WNBA player’s. Jason Belmonte earned $238,912 while the top WNBA salary is $110,000. So even relative to other non-major professional leagues, the WNBA struggles for relevance.
Is it possible, however, that this simply shows an inherent sexist bias by consumers against women’s basketball?
Unfortunately the “blame the patriarchy” narrative doesn’t hold up when you compare the WNBA to the college game. This year’s Women’s NCAA Championship managed 3.5 million viewers on ESPN this year — down 9% from 2017. Meanwhile last year’s WNBA championship series averaged 487,000 viewers, with a high of 597,000 for Game 1. These numbers were promoted by the league as the highest since 2003.
Of course, TV ratings themselves are less important to this topic than dollars attached to their television contracts, and to the WNBA’s credit ESPN doubled the value of their contract with the league to $25 million a year in 2016. This has led David Berri of Forbes to argue that because WNBA salaries make up less than a quarter of league revenue, as opposed to the NBA’s 50% split, the WNBA is clearly exploiting their players. Undermining Berri's position is the simple observation that revenue is not the same as profit — another measure by which the WNBA has consistently struggled. As the New York Times reported in 2016, only half of WNBA teams have managed to become profitable 20 years after the league's founding.
RELATED: "Why Aren't Female Soccer Players Paid More?" by Ryan McMaken
A case can actually be made that WNBA players are actually overpaid relative to what consumers actually want. After all, the WNBA is subsidized by the NBA in a variety of ways including direct financial support, free publicity, and the fact that many WNBA franchises are owned by the city’s NBA owner. In fact, the WNBA’s big television contract was itself a byproduct of the channel reworking its agreement with their male counterpart. Government interventionism also benefits the sport, as Title IX requirements have forced colleges to maintain women's basketball programs if they wish to keep their men's team. So instead of grumbling about the salaries male basketball players enjoy, perhaps A’ja Wilson should be thankful that the men's product helps bolster her own paycheck.
At the end of the day, just about any article focusing on how athletes are either under- (or over-) paid stems from the fallacious view that their compensation is an inherent product of their labor, rather than the subjective values of consumers.
The financial success of professional athletes has almost nothing to do with their talent and everything to do with the entertainment the public receives from it. LeBron James is one of the greatest athletes in human history, but if his sport of choice generated the public interest the WNBA has, he would not be signing a $154 million dollar contract. This also helps explains why e-sports players are making more money than the best in the WNBA. No pain can still result in financial gain.
Of course consumer preferences can change. Perhaps the American public will come to appreciate the strong fundamentals of the WNBA and, as a result, salaries will improve. Until then, women basketball players should perhaps look for markets that place greater value on their skill. Like Russia.
It seems like the media will never stop promoting the myth that public school teachers are “underpaid.” The most recent example is the front-page story in Time, “This Is What It’s Like to Be a Teacher in America.”
Time tells of a woman who makes $55,000 per year teaching but works two other jobs in order to “pay the bills.” The article includes complaints about a teacher making almost $70,000 per year and even suggests that sexism is partly to blame for deficient pay because there are more women teachers than men.
It is no surprise that the media promotes these sorts of stories. They want public elementary and secondary school teachers to make more money. Unfortunately, it is probably not for the reason they want us to think. For if the media cared about teachers as a class, they would also advocate for private school teachers (who make far less than public school teachers on average). There is something about public education that concerns them.
The likely explanation for why the media constantly tell us that public school teachers should be paid more is that teachers unions and the media are political allies. It is no secret that the teachers unions have strong ties to the Democratic Party . And the mainstream media, including publications like Time, leans to the political left.
What About Private School Teachers? Of course, the media can successfully push for greater pay for public school teachers because they are paid through taxation, while private school teacher pay is dictated by consumer demands. This is the difference between taxation and voluntary exchange. The amount of money raised by taxation can be almost unlimited regardless of the utility provided, while the government’s subsequent expenditure is arbitrary in both quality and quantity, without any connection to consumer valuation.
This is the great irony of the claim that public school teachers are underpaid. By socializing education, state governments have removed the very market forces that determine wages. So there is no way to measure what a teacher actually “should” be paid.
There are private schools in America, but these schools are an imperfect measure of teacher pay because the government’s quasi-monopoly on education decreases demand for private education. Parents are much less likely to pay for private schools when “free” public schools are readily available. Those who send their children to private schools effectively pay double tuition, as they must continue to pay property taxes for public schools that they do not use.
Public School Teachers Are Overpaid However, a comparison between public and private schools suggests the opposite of what the media claims. It is not that public school teachers are paid too little. Rather, public school teachers are paid too much. It is quite certain that few kindergarten teachers would be making anywhere near $70,000 per year in a free market of education. Yet wealthy school districts can pay this much because the revenue from property taxes is so high.
We can know that public school teachers on average make too much money because government employees in general make more than their private-employee counterparts . Government employees, including public school teachers, receive hefty pensions and insurance packages as part of their compensation. These benefits, as well as the favorable hours and extensive vacations, are often left out of discussions of teacher pay.
The wage premium of public school teachers is primarily due to the government’s quasi-monopoly of education and the high revenue brought in by taxation. In addition, teachers unions have decreased competition and driven up wages by lobbying for unreasonable state certification standards (usually requiring a degree through a university’s college of education rather than mere proficiency in the subject taught).
Of course, some teachers would be paid a high wage in a free market. However, this would be the best and most skilled teachers, not just those who teach for many years and receive automatic annual pay increases (a practice that was negotiated by unions). The current public school system actually discourages teacher development by rewarding the number of years worked instead of the individual’s performance.
Only the Free Market Can Determine Wages The central point is that a school system that is exempt from market forces is unable to calculate the market value of schooling and the wages of the teachers who provide their services. Instead, teacher salaries are determined by government bureaucrats, and these vary widely by state and district.
Public school teachers are not “underpaid.” No one knows what they should be paid because there is no free market to address this question. However, we can be sure that many public school teachers are earning far more than they would be if exposed to market demands, where schools seek to provide the best education for the lowest cost. Free choice in education would link a teacher’s pay to the value of his or her services, in contrast to the current coercive system that pays many teachers more than their productivity justifies.
One of the more persistent myths about capitalism is that wealth and resources are "wasted" when spent on luxuries.
At the core of this myth is the idea that when you buy, say, a $5,000 75-inch LED television, the money you spend on that item goes only to improve the life of the person who ends up owning the television. "Look at those rich people and their expensive televisions! Don't they know that some people in the world don't have televisions at all?"
This is an old story. The basic premise of shunning luxuries has long been this: people should not spend their money on luxuries while there are some people in the world who can't get enough to eat, or who lack adequate housing, or who lack an education.
Now, there is no doubt that real value can be obtained from charitable giving to people who live in poverty. Both the giver and recipient benefit. Encouraging people to share the wealth in this way — freely and without state coercion, of course — is a good thing.
However, much of the argument being made against spending on luxury items completely ignores the many non-wealthy people who benefit from creating and selling luxury items and services to relatively-more-wealthy people.
Put another way: many people benefit when the rich are separated from their money — and an easy and non-violent way to separate the rich from their money is to convince them to buy luxurious goods and services.
Who Benefits After all, in the case of a high-end television (or any television), who benefits? Many people who aren't rich people.
For example, if the television is purchased at an electronics store, the person who sells the item then earns a commission. Or, if it's a non-commission job, then the salary must come out of the proceeds from the sale of the television. The same is true of everyone else who works in the store, from the manager, to the cashier, to the janitor.
The truck driver who delivered the television to the store, of course, has value as a worker because someone wanted the television he delivered. And then there are the people who actually assembled the television, and the people who built the parts used to make it. The fact these people may live far away in some other country doesn't make them irrelevant or unimportant.
And we need not stop there. Many other people earn money because people buy luxury goods. The advertisers and marketers who let people know about the existence of these luxury items exist because the goods are sold. The insurance salesmen who sell the casualty and liability policies to the sellers and manufacturers of these luxury items also can earn a living because some people like to buy expensive televisions.
The situation is not fundamentally different if someone buys the television online. Someone must still deliver the television. Someone must build the truck that it is delivered in.
Similar situations occur with all products and services.
It's true that some of that money goes to CEOs. And some of it goes to stockholders — many of whom are certainly not millionaires. But the fact that some wealthy people partly benefit from some industry, good, or service, is hardly a reason to limit or abolish those things.
The Problems with Forced Redistribution Some may respond to these observations by claiming, "well, if we forcibly redistributed all that money spent on luxuries, that television delivery driver wouldn't have to work hard just to feed her children or help her ailing mother.
In other words, at the core of the "money-spent-on-luxuries-is-wasted" argument is often an assumption that some government agency could do a better job of allocating the money.
But let's look at what would be required to "re-allocate" this money in an allegedly better way.
First of all, government agents would have to determine which people are spending too much on luxuries, and then determine what portion of their income to confiscate for purposes of re-allocation.
Then, it must be determined which people will receive the redistributed funds.
All of this will be dictated by rules and regulations, and government bureaucrats will take their cut in the re-allocation process, of course.
In the end, some people will end up with more money than they had before. And some will have less. And government employees will certainly have more.
But, can we be sure that the delivery driver who supports her family with the profits from television sales will actually be better off? No, we can't be sure. Its entirely possible, that as the wealthy are less able to purchase luxuries, the driver will have her hours reduced. She may then have to find a job working in a field she less prefers, and possibly even hates.
Moreover, we can't be sure that she'll even see a net gain in her income, since the rules authored by bureaucrats may not favor people in her particular situation.
It spreads outward from there. As luxury spending is forcibly curtailed, everyone who earns a living from the sales of these items will themselves see a reduction in their income.
And finally, the workers overseas in poor countries who made those televisions will see less demand for their work, and thus less income. These people are probably the ones who will suffer the most from our attempt at punishing people who spend too much on luxury items.
The cumulative effect is substantial, and there's no way a government planner could account for every possible outcome.
And then, of course, there is the total arbitrariness of declaring some things to be luxuries and other things to be essentials. Are all televisions luxuries? Or are some televisions "essential"? And if some televisions are essential, at what price level do they become luxuries?
Many things that appeared to be wildly luxurious and largely unattainable to past generations are considered to be essentials today. Telephones, microwave ovens, air-conditioners, and refrigerators were all once luxuries for a few privileged consumers.
Needless to say, there is no objective measure by which a government agent might declare some items to essential, while others are mere, unnecessary frills.
So, the next time we witness someone who is spending money on some luxury we deem unnecessary, whether it be a luxury car, a seemingly pointless toy, or a service that "nobody needs," it's helpful to keep in mind that those who sell and market such goods are usually ordinary people.
Last week cable channel HBO premiered the documentary Breslin and Hamill: Deadline Artists. Regardless of one’s politics, it’s a very interesting and entertaining look into print media's grand past, and at two of the greats (Pete Hamill and the late Jimmy Breslin) when it came to columns that gave readers the impression they were walking the streets alongside these most street-smart of writers.
Breslin in particular liked to bring his readers very close to major news stories, and did just that during the Crown Heights (Brooklyn) riots of 1991. The three days of tumult and violence took place in the aftermath of a tragic car crash in which a car driven by an Orthodox Jewish driver struck and killed a 7-year old black child while seriously injuring his cousin. Breslin, being Breslin, took a cab right into the middle of the rioting. His subsequent column referenced the impoverishment of the black Crown Heights residents who surrounded the car he was in, and how they desperately needed “money.”
“Money” is placed in quotes simply because Breslin missed the point. No one wants “money” as much as they want what money can be exchanged for. Money can’t be eaten; rather credible money can be exchanged for goods and services. What Breslin really meant is that rioters in Crown Heights citizens desired goods and services not commensurate with the dollars in their pockets.
Which brings us to a recent Washington Post opinion piece by columnist Catherine Rampell. Not surprisingly, Rampell thinks Elizabeth Warren’s wealth-tax plan is a fine idea, and that it “could correct past mistakes.” That Rampell is unwittingly arguing with herself in her desire to penalize the rich will soon become apparent, but for now it’s worth addressing a few basic falsehoods promoted by an economics columnist who lacks a feel for her specialty.
Up front, Rampell asserts that “Over several decades, U.S. policies have facilitated a systemic upward redistribution of wealth.” Oh dear no, that’s so untrue. Wealth is a function of investment, and the capital gains tax that penalizes investment has risen from 15% earlier in the 21st century to 23.8% when we factor in the Affordable Care Act surcharge. No doubt the capital gains tax is lower than what prevailed in the slow-growth 1970s, but it’s hardly been declining modernly as Rampell's column suggests. To be fair, the tax should be zero. There are quite simply no companies and no jobs without investment first, so in a reasonably sane world no one would be charged for putting wealth to work.
So while Rampell is incorrect about the direction of policy, she also misses the whybehind the wealth surge. The latter is plainly an effect of technological advances that Rampell would likely be very frustrated if forced to live without. Simply stated, the internet and other leaps that have figuratively shrunk the world have made it possible for geniuses like Jeff Bezos to meet the needs of exponentially more people around the world. Thanks to the internet, wealth wasn’t “redistributed upward” as much as it was created by brilliant minds touching more and more of the world with their unparalleled ability to serve. Assuming Rampell really wants to shrink a rising wealth gap, a gap that plainly signals a massive reduction in the lifestyle gap between the rich and poor, her columns would be most effective if she made them about abolishing the internet.
Unaware of what she's actually proposing, Rampell naively aims to put a halo around her own head in her calls to neuter the rich. Implicit in her desire to harm a whole class of people is that in pushing down those with means, she’d like to lift those without. In calling for a forced transfer of money from the haves to the have nots, Rampell is less artfully committing the same error that Breslin did nearly 30 years ago: she presumes that “money” is what the poor need. No, the poor need what money can be exchanged for; the more the better.
Crucial here is that the rich become rich precisely because they mass produce former luxuries. In their failure to understand this truth, this is where Rampell and the wealth redistribution crowd shrink to arguing with themselves. While expressing a desire to essentially geld those who’ve created wealth, they’re unwittingly seeking to penalize those who’ve gotten rich through their transformation of scarce goods enjoyed by the few into common goods enjoyed by everyone. Goodness, in 1991 a computer that we'd all arrogantly turn our noses up to today cost $10,000, the most primitive of mobile phones retailed in the thousands such that they could generally only be found in Beverly Hills, Manhattan or the Hamptons, and then a simple 30 minute phone call (on a landline no less) from Baltimore to Washington, D.C. set the common man back $10 to $20. Rampell believes the poor want “money,” but like us all, they want things. The rich get rich by virtue of democratizing access to “things.”
Useful about the above is that today’s newly rich required investment to vivify in the literal sense their desire to democratize access to what the rich used to solely enjoy. This is where inheritors of wealth come in. Unless they’re stuffing the wealth passed on to them under mattresses, they’re investing it. Get it? For Rampell to cheer wealth taxes is for her to cheer the shrinking of the capital that’s necessary for entrepreneurs to turn ideas into real, living standard advances.
Rampell wants the poor to have more money, but money’s only useful insofar as it’s exchangeable for the goods and services that we all really want. The rich get rich by virtue of making what's dear rather cheap, thus helping the poor the most. Inequality is poverty’s greatest enemy. Rampell seeks to neuter the unequal. She’s arguing with herself.
Originally published at Real Clear Markets
In the latest episode of conservatism as “progressivism driving the speed limit,” former U.S. Senator Rick Santorum proposed the idea of paid leave at the Conservative Political Action Conference (CPAC).
This idea is starting to manifest itself as a political reality with Senators Mike Lee and Joni Ernst who are introducing the CRADLE Act.
This was loosely inspired by a bill that Senator Marco Rubio introduced last year, which proposed allowing new parents to draw money from Social Security for child-rearing purposes. This represents an addition to the Family and Medical leave act of 1993 which mandates 12 weeks of job-protected unpaid leave for some employees.
How Parental Leave is Factored in Wages There are two problems with federal intervention in how employers determine leave for employees.
The first problem is the new aspect of government-paid leave created with the CRADLE act: tax-funded leave. Funded leave would be covered by federal programs, which are in turns funded at least partially by payroll taxes. These taxes, imposed on both employer and employee, reduce employees wages, and lessen what an employer can pay.
If federally-funded leave is paid for with an increase in payroll taxes, this will continue to put downward pressure on employee wages overall.
At this time, however, few are proposing to raise payroll taxes, and it looks like the payroll-tax status quo will prevail for now.
Thus, the primary problem with employee leave remains its mandatory nature, whether paid or unpaid.
Ultimately mandatory paid leave imposes higher costs on both the employers and on employees who do not qualify for — or need — leave time themselves. It is essentially a transfer of income and wealth from non-leave-using employees to leave-using employees. The business owner, of course, is also faced with greater uncertainty and with higher employees costs, which can lead to lower utilization of employees overall.
How Parental Leave is Factored in Wages In a true market economy, entrepreneurs are responsible for providing labor opportunities. It is the entrepreneur who pays for the factors of production (labor in this case) beforehand to get finished goods and services in exchange.
At the same time, the entrepreneur must be able to bring about these goods or services at a price lower than what customers are willing to pay. If not, the business will fail.
Wages behave according to this principle. Entrepreneurs only hire employees if the workers are able to produce more than they cost the employer. That is, as with any consumer good, the perceived value of the worker must be higher than the cost.
Paid parental leave is not a free gift to workers. Mandatory paid leave is ultimately a tax that businesses will have to shoulder and will eventually be absorbed by employer, employees, and customers. When leave is mandated, it forces the employer to make expenditures in addition to the wages he already pays to employees. In turn, the wages employees take home are reduced accordingly.
Uncertainly is a problem as well. In a modern economy, labor mobility is sizable, and it’s not feasible for most companies — especially smaller businesses — to pay parental leave for an employee who will likely leave within a few months. In turn, an unintended consequence of government-mandated paid leave would be hesitance on the part of employers to hire new workers, which in turn reduces employment across the board. This makes the cost of business much higher and impedes business growth
When government mandates, regulations, and taxes are offered as “solutions,” we continue to perpetuate the cycle of government growth and stifled innovation.
Make Life Affordable Via Deregulation How about we look at the root problems instead?
In 2018, the Competitive Enterprise Institute reported that the economic effects and regulatory compliance costed the U.S. economy $1.9 trillion dollars. Not to mention the many companies that do not exist due to America’s burdensome regulatory apparatus. Further, when regulations like zoning are in place, it becomes more difficult to acquire quality housing at an affordable price for those who want to start a family. Americans are trapped in a regulatory maze that makes activities cost prohibitive and reduces the standard of living.
On the other hand, capital accumulation – not government programs – is how the standard of living is improved. In The Theory of Money and Credit, Mises recognized this:
There is only one efficacious way toward a rise in real wage rates and an improvement of the standard of living of the wage earners: to increase the per-head quota of capital invested.
It’s ultimately companies and employees who should be the ones negotiating their leave plans. Certain companies pride themselves in their benefits and position themselves accordingly as “family friendly.” In a genuinely liberated economy, company-sponsored leave may soon become a feasible option for companies that want to stand out and attract workers.
Instead of falling for the “feelgood” legislation that our political climate fosters, we should be looking at long-term solutions like dismantling the regulatory state instead.
Before Margaret Thatcher became prime minister in 1979, Britain’s epithet was "the sick man of Europe." The preceding drift into ever-greater socialism was accompanied by monetary inflation, which was driven in part by unionised labour in nationalised industries striking, or threatening to do so, for wages which were uneconomic. The differences between cause and effect during periods of monetary inflation only serve to conceal the root of the problem, and that is inflationary financing.
Without any factual basis, central bankers claim that some price inflation is a good thing. They set an inflation target to aim at, commonly agreed at 2 percent. There is no control over the expansion of money and credit, which is permitted to run riot, so long as the inflation target is not too obviously violated. But the fact remains that inflationary financing has become central to the state’s finances.
Since 2010, the UK’s government debt has increased by 59 percent of 2010’s GDP. This has been financed by the expansion of money and bank credit. While statisticians often argue that so long as government borrowing is financed by private sector savings, it is non-inflationary. But this argument ignores the fact, that if savings are diverted from their use in the private sector, the gap is filled, one way or another, by the expansion of bank credit. And as we should know, the expansion of bank credit is simply monetary inflation.
Therefore, the expansion of both bank credit and base money is a good measure of the degree of a government’s inflationary financing, and we can confidently conclude that the dilution of people’s money is far greater than suggested by government price inflation statistics.
This lack of apparent price inflation can only be for two reasons. Either statistics fail to reflect the degree of loss of purchasing power of the currency, or people have collectively increased their preferences for money over goods and services. But given the increase in consumer debt and the inability of eight out of ten British workers to survive between pay-days without credit, it is hard to see that preferences for money relative to goods have actually increased.See https://www.consultancy.uk/news/18492/eight-in-ten-uk-workers-unable-to-make-ends-meet- between-pay-days
Monetary inflation is barely understood by the public, which is why governments love printing money. They don’t let on that monetary inflation dilutes everyone’s earnings and savings. Instead, they promote a belief in easy money and cheap credit for businesses so they can employ more people. And because, as Keynes put it, not one man in a million will detect the theft, monetary inflation is irresistible to spendthrift governments.The actual reference was “There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces on the side of destruction and does it in a manner which not one man in a million is able to diagnose.” (The Economic Consequences of the Peace, 1919).
We can put inflationary financing in the same category of nonsense as believing a weaker exchange rate makes exporters more competitive and stimulates job creation. But any economist with a modicum of observation will know that an economy with a strong currency, such as Germany and Japan in the post-war years, achieves a strong economy more successfully than a state which has a policy of weakening the currency.
Of course, the empirical evidence, that in the long run a sound currency is always better than a weak one, takes some explaining to a neo-Keynesian audience. Confusingly, Japan has managed to expand the quantity of yen in circulation without appearing to undermine its purchasing power. Much of the explanation is found in the Japanese propensity to save, which put another way is the same as saying the population of Japan uses the expansion of money and bank credit to increase their bank balances instead of spending it. This contrasts with Keynesian consumption theories that abhor saving, preferring inflationary financing. It has predictably resulted in persistent trade deficits and a weak currency.
In the UK, a combination of fiscal and monetary policies aimed at discouraging savings dissuades ordinary people from accumulating wealth through thrift. No wonder an estimated 78 percent of the UK’s working population have no financial reserves and are unable to make ends meet between pay-days. We appear to have arrived at the end-point in Keynesian economics.
Unless something is urgently done to reverse this trend, the economic condition of low-income Britons will worsen. Furthermore, in the slightest down-turn more of them will become dependent on the state. The state then scrambles for more revenue, taking it from the productive middle-classes by higher taxes and yet more monetary inflation. Wealth, the life-blood of any economy, is destroyed at an increasing pace, and with it the ability of society as a whole to maintain a reasonable standard of living.
The solution is to halt the destruction of wealth and savings and have faith in the ability of ordinary people to manage their own affairs without government intervention. Central to these free-market policies is sound money. There are other policies that must accompany it, such as eliminating taxes on savings. Government must be downsized. It must rescind the tide of regulation. The banking system must be reformed so as to address destructive cycles of credit expansion and contraction. But central to it all is sound money.
The greatest resistance to a sound money policy will come from neo-Keynesian economists, whose beliefs are riddled with contradictions. Theirs are the policies that have ensnared the UK and other welfare states in debt traps, from which there is no easy escape. They are already discredited by the results of their dogmas. The political task facing a Johnson government will be not so much to convince economists of their errors but to promote the concept of sound money and associated policies over their heads to the general public. Card-carrying socialists may not like it, but properly presented the silent majority almost certainly will.
It may be too late in the cycle to avoid an overdue credit crisis, likely to be made worse by American trade policies. In which case, a proper understanding of the destructive forces of monetary inflation compared with the economic benefits of sound money is urgently required. It has been done before: the UK emerged from the destruction and debt of the Napoleonic Wars to a gold standard under which the government reduced its debt burden and the economy boomed in an industrial revolution. It defied modern Keynesian explanation.
Excerpted from An Aide-memoire for Boris
In today’s political discourse, the minimum wage is frequently mentioned by the more progressive members of Congress. On a basic level, raising the minimum wage appears to be a sympathetic policy for low-income wage earners. Often kept out of the conversation, however, are the downstream effects of this proposal. The consensus among economists has always been that a price floor on “low-skilled labor” leads to unemployment “among the very people minimum wage legislation allegedly helps.” Surely those who retain their employment will reap the higher hourly pay but not without consequence to the rest of the “low-skilled” labor market.
Government-mandated minimum wage increases directly result in a higher price floor for hourly labor. The more indirect consequences include reductions in hours worked, layoffs, automation, operational changes, and loss of opportunity. In Economics 101, students are taught about trade-offs. A trade-off, as defined by the Business Dictionary, is “a technique of reducing or forgoing one or more desirable outcomes in exchange for increasing or obtaining other desirable outcomes in order to maximize the total return.” We incur trade-offs every day, such as the decision to buy dinner from a restaurant for $10 or to eat our holiday leftovers. Businesses incur trade-offs as well.
For example, let’s consider your local grocery store. The grocer may employ ten people, including one manager and nine employees. The manager makes well over the current minimum wage, but six of the nine other employees make the current minimum wage. If the current minimum wage is increased from $7.25 to $12.50 per hour, the rate of increase is 72.4 percent. While this increase may sound reasonable from the perspective of some readers, this is a large increase given the relatively low profit margins in this industry. What are the downstream effects?
The employer may either reduce the hours worked for employees or lay off staff. Several things result:
Those who are not laid off will reap the benefits of a higher minimum wage, but they will have to work harder to make up for less staff.Staff making a wage higher than the old minimum wage but lower than the new rate will also request that their wages be increased to distinguish them from their peers (those who retained their jobs at the higher minimum wage) and to compensate them for their skills.Those who are laid off will be forced to find other employment.There may be a lack of employment due to these employees being priced out of the market. The Effects on Youth Employment Meanwhile, rapid advancements in technology may result in fewer job opportunities when the cost of labor is higher. Think of your local Kroger’s self-checkout line or Chick-fil-A’s mobile-ordering application.
Not surprisingly, American Action Forum’s evidence indicates that minority youth may be the most negatively affected by wage price floors. Various studies have analyzed the impact of minimum wage increases, most of which have been gradual increases implemented over a period of years. In an EconTalk podcast with Russ Roberts, Jacob Vigdor shared his main findings about Seattle’s minimum wage increase: “First of all, the minimum wage did appear to raise wages. … That’s what we expected to see. But when we looked at employment, we actually saw a reduction.” Vigdor further mentions that hours worked decreased as wages went up.
The study showed that the amount of money paid in the low-wage labor market declined overall, or in the aggregate. The results varied depending on the level of experience of the worker; those with the most work experience came out ahead. Vigdor’s study shows that on average their paychecks were twenty dollars higher per week. But the biggest loss “in terms of much lower pay would be amongst the workers who hadn’t even entered the labor market yet when the minimum wage started to increase, because they were finding it harder to find any work at all.”
The key takeaway from Vigdor’s study was the minimum wage’s effect on workers who had yet to enter the labor market. In effect, the higher minimum wage created a barrier to entering the hourly labor market for those without experience. Who tends to lack experience? Young individuals and immigrants.
As any young individual seeking an internship or their first job knows, the hardest thing about the search is having sufficient experience. Experience means that the individual needs less training and can be productive on the first day. Businesses understand that “on-the-job training is an investment, and at $15 an hour that investment doesn’t make sense from the business owner’s perspective.” This investment makes even less sense when it is understood that the teenager will only work for a few months and then leave, a dilemma that many employers face during summer and winter breaks.
The Employment Policies Institute addresses teen unemployment in an article titled “The Teen Unemployment Crisis: Questions and Answers.” It notes that one of the goals of the Fair Labor Standards Act (FLSA) is to “protect the educational opportunities of minors.” Problematically, increasing the cost of labor disincentivizes companies from hiring workers, especially those who require training. Additionally, as technology rapidly advances, easily automated functions may become obsolete for workers. Policymakers must consider the interests of ensuring a viable labor market for our nation’s youth while promoting policies that incentivize businesses to pay decent wages.
Although many teenagers may be predisposed to sympathize with progressive policies like minimum wage increases, they ought to understand the larger implications of such proposals. Markets can withstand gradual change, but they may be unable to adequately adjust to steep increases in the cost of labor. In New State Ice Co. v. Liebmann, US Supreme Court justice Louis Brandeis famously described how a “state may, if its citizens choose, serve as a laboratory; and try novel social and economic experiments without risk to the rest of the country”; Justice Brandeis coined the phrase “laboratories of democracy.” Twnety-nine states and the District of Columbia, as of 2019, have experimented with minimum wage increases. But studies have demonstrated that these progressive “successes” do not come without unintended consequences.
It is clear that arbitrary minimum wage laws are not only ineffective, but actually detrimental to real wage growth. So what type of action results in increasing wages in the United States, or any country for that matter? The only way to raise real wages is to increase the per capita amount of capital invested by increasing capital accumulation. To accomplish this it is first important to understand what is meant by capital accumulation.
Capital accumulation, as explained by Ludwig von Mises, is wealth that is created and owned by businesses and individuals. This wealth is both saved and reinvested to create further profit. The capital which is accumulated is encompassed in everything that businesses utilize, from tools to vehicles to buildings and everything in between. Both individuals and businesses create further profit by loaning out excess wealth (either through direct investment or by holding money in traditional savings accounts). It is important to note that this accumulation can only occur when more wealth is created and saved than is consumed.
It is critical to reject the commonly held belief that the relationship between wealth and the creation of wealth is zero-sum. It is fallacious to assume that the wealthy getting richer makes the poor worse off. Instead, this wealth creation makes everybody better off! The standard of living in the United Sates is higher than in all but a few other countries in the world not because US politicians are smarter than their foreign counterparts, but instead because of the high per head quota of capital that is invested. This high level of investment has allowed businesses to use the most efficient tools available through capital investments, and this is why United States workers are so productive. People in other countries do not lack the intelligence to grow, but suffer from inadequate capital needed to drive higher efficiencies, which lead to increasing production yields. As the accumulation of capital becomes greater, wages will rise as businesses compete for the most skilled workers. Only through these market processes can wages increase for everyone rather than for the lucky few who benefit from minimum wage laws.
The best way for government to encourage capital accumulation is to resist intervening in the marketplace. Manipulating interest rates and the money supply through the federal funds rate or monetary policy sends the wrong signals to businesses. As the interest rate artificially drops and encourages borrowing, individuals will save less and businesses will take on projects they would not have pursued otherwise. These malinvestments, as Mises calls them, are the direct result of government intervention and are detrimental to the accumulation of capital. Examples of malinvestment are present all over the world, from the United States housing bubble to unfinished skyscrapers such as the Nakheel Tower in Dubai.
Another way to encourage capital accumulation is lowering tax rates, particularly for corporations and wealthy individuals. Although this may be counterintuitive to some who think that it is the government's role to redistribute excess wealth to help the common man, this is not the case. In Planning for Freedom: Let the Market System Work, Mises writes:
The only way to do away with poverty they know is to take away—by means of progressive taxation—as much as possible from the well-to-do. In their eyes the wealth of the rich is the cause of the poverty of the poor. In accordance with this idea the fiscal policies of all nations and especially also of the United States were in the last decades directed toward confiscating ever-increasing portions of the wealth and income of the higher brackets. The greater part of the funds thus collected would have been employed by the tax-payers for saving and additional capital accumulation. Their investment would have increased productivity per man-hour and would in this way have provided more goods for consumption. It would have raised the average standard of living of common man. If the government spends them for current expenditure, they are dissipated and capital accumulation is concomitantly slowed down. The taxpayers or businesses are able to save and invest more if they are taxed less, or not at all. Although this does make them more wealthy, it does not make the common man more poor. Instead, from a material perspective everybody prospers. By allowing wealth accumulation, resources are enabled to flow into their most efficient uses, dictated by consumer demand instead of by bureaucrats deciding how to transfer money. The following graphic from the Tax Foundation is a perfect illustration of Mises's argument that lower taxes result in increased production and wages.
[[{"fid":"89000","view_mode":"image_no_caption","fields":{"format":"image_no_caption","alignment":"","field_file_image_alt_text[und][0][value]":"employ","field_file_image_title_text[und][0][value]":false,"field_caption_text[und][0][value]":"","field_image_file_link[und][0][value]":""},"type":"media","field_deltas":{"1":{"format":"image_no_caption","alignment":"","field_file_image_alt_text[und][0][value]":"employ","field_file_image_title_text[und][0][value]":false,"field_caption_text[und][0][value]":"","field_image_file_link[und][0][value]":""}},"attributes":{"alt":"employ","class":"media-element file-image-no-caption","data-delta":"1"}}]] The most effective way to increase production and the standard of living is to promote wealth creation and saving by allowing savers and entrepreneurs to save and invest, unfettered by interventionist policy. A laissez-faire approach does not strictly favor the wealthy capitalist, but also the interests of the common man.
Listen to the Audio Mises Wire version of this article. On February 10 the stock markets were at all-time highs, with the Dow 30 at almost 30,000. The unemployment rate was at an all-time low and interest rates around most of the world were at all-time lows.
With interest rates near zero for an entire decade, the value of stocks, bonds, real estate, land, and virtually any asset was artificially inflated. As a result, total household net worth doubled, increasing from $60 trillion to $120 trillion!
People were saying that things were too good to be true. Everything from giggling about personal finances at the gym to people embarking on unlikely business projects, and business owners being shocked when told it would not last, and even record-breaking skyscrapers. Things were too good to be true.
Now the popular refrain is that the coronavirus caused the economy to collapse. The government shut down the economy, putting people out of work. so there has been less consumption. Whole industries have been shuttered. The unemployment rate has skyrocketed, increasing by more than 10 percent in the last couple of weeks.
It is easy to see how politicians, the media, and even real people see this coronavirus situation as causing the economic collapse. A caused B. This in turn created the supposed need for trillions of dollars in subsidies, bailouts, and unemployment benefits. Plus the Federal Reserve would have to inject many more trillions of dollars to bail out every aspect of the financial industry including junk bonds and student loans.
All of this is false in the sense that A did not cause B. A, the coronavirus, did not cause B, the economic crisis; it merely triggered it, causing it to occur earlier than it would have. It may have also accelerated the collapse, and will likely deepen the trough of the crisis in business cycle terms.
In other words, the economy was weak, not strong. The fundamentals were weak, not strong. Balance sheets were weak, not strong.
This weakness could be clearly seen when President Trump began to publicly attack Federal Reserve chairman Jerome Powell for raising interest rates by 2 percent, which he rightly thought would hurt the stock market and his reelection chances.
The stock market thrived when interest rates were negative when adjusted for price inflation. However, when Powell pushed the inflation-adjusted rate to near zero, stock markets stalled and all political hell broke loose.
Let’s get back to the economic fundaments prior to the coronavirus. We are all consumers, so, starting with the consumer we find that, as a whole, consumers had a great deal of debt and not much in the way of savings.
There was certainly an effort to increase savings after the housing bubble crisis. The personal savings rate, which had fallen to 2 percent before the previous crisis (the housing bubble), had now risen to 7 percent but was still well below the 10+ percent that was normal when we on the gold standard.
The main villains behind a depressed savings rate are inflation and taxation on interest income. One-third of American households have zero savings and 60 percent have less than $1000. In effect, the Fed and the Treasury have needlessly put millions of households at risk.
Consumer debt is now more than double the amount prior to the last crisis, student loans are now more than $1.6 trillion, and the combined consumer credit of households and nonprofits is over $4 trillion. And, of course, this debt is not evenly distributed across the population, as some people have enormous debts relative to their ability to pay and some have none.
Before the virus, the labor market was also a mess despite a record low unemployment rate. There were millions of jobs that were going unfilled and millions of college graduates who could not get jobs in their desired fields, but who were instead working as waiters and bartenders and living at home. One of the biggest villains here is student loans, which encourage too many teens into college and put them on unproductive career paths.
The other big factor distorting the labor market is the Fed and its monetary policy. The unpreceded decade-long zero interest rate policy has caused a massive business cycle. Here, by artificially causing malinvestments, the Fed changed what types of jobs are in high demand and distorted income distribution as well.
In general, the Fed’s interest policy has increased the demand for very highly skilled workers such as electrical engineers, biochemists, and patent attorneys with graduate degrees. The increased demand for these types of labor has increased wages and distorted the distribution of incomes.
These types of workers are necessary to produce such things as new iPhones, software platforms, computer chips, and pharmaceuticals, all of which require a significant amount of work by patent attorneys.
Another way to view the distortions in the labor market is to take note of the number of job openings. In December 2019 the number of openings was 7.3 million, the highest number since it began to be counted in 2000. One of the reasons I suspected an economic crisis was around the corner was that this number stopped climbing and began to fall noticeably, before it recently plummeted.
Meanwhile, the unemployment rate for recent college graduates had been 41 percent and about one-third of all college graduates are underemployed, meaning that their job does not require a college degree. Remember, total student loan debt has skyrocketed to $1.6 trillion. These are all signs of a badly distorted labor market.
The too much debt/too little savings distortion can also apply to businesses and corporations, especially financial institutions. Some corporations have plenty of cash, such as Apple. It was so flush with cash that they started giving dividends to their shareholders.
But more telling is the problem of corporations using cash to buy back shares in their own company instead of investing in productivity. Another was the recent wave of mergers and acquisitions. Apparently, the Fed’s zero interest rate policy has driven the marginal return of capital so close to zero that corporations have resorted to these types of financial manipulations in an attempt to increase profits.
In summary, despite stellar numbers in the stock market and an all-time low unemployment rate, the US economy was already headed for an economic crisis. Prior to this economic crisis, we could clearly see that many consumers could barely pay their bills and had virtually no savings to rely on. The labor market was also badly distorted, with highly skilled markets booming, a record number of job openings, and massive numbers of recent college students unemployed or underemployed. Finally, the corporate market was also distorted, with firms using atypical financial manipulations such as share buybacks and mergers to increase profits. The viral pandemic merely triggered or revealed what was ultimately going to happen.
The universal basic income (UBI) is gaining popularity as the alternative to the current welfare system. The idea is to give each citizen the same amount of money, no matter if he or she works or not. Therefore, unlike traditional welfare systems, the UBI has no means test, nor willingness-to-work test. Nobody would be then left without a livelihood even if there is no work for him. Doesn’t that sound great?
The problem is that the program must be financed somehow. Let us assume for simplicity that there are 250 million adult Americans and that each of them would receive $1,000 monthly (as presidential candidate Andrew Yang proposes). So we get a total cost of $250 billion monthly and $3 trillion annually. It would amount to about 14 percent of US GDP, or 42 percent of total government spending, or 73 percent of the federal outlays. For comparison, this is more than the total expenditure on health care, defense, and education. And yet we are talking about “just” $12,000 annually (or 19 percent of the median household salary, or 36 percent of the median personal income). Good luck with such an expensive program!
This is why the UBI is a utopian idea. Its introduction would require either a departure from universality (e.g., providing benefits only for young people), or a departure from unconditionality (e.g., the introduction of an income criterion), or reducing payment to small symbolic amounts. Other options include a radical increase in taxes, or implementing "modern monetary theory" and launching the printing press.
The first two options would distort the idea of the program, transforming it into another traditional welfare program. The third scenario would not fulfill the program goals, as it would neither eradicate poverty nor significantly increase social security. And the last two options would have negative overall economic consequences that could lead to the results contrary to the intentions of the program, (e.g., an increase in the unemployment rate as a result of additional tax burden on wages), or a reduction in the amount of real benefits as a result of increased inflation. It means that the implementation of the UBI at a substantial level without incurring significant economic costs is a myth.
This is confirmed by a recent article “Basic income or a single tapering rule? Incentives, inclusiveness and affordability compared for the case of Finland” published by OECD economists on the occasion of an experiment with UBI in Finland (which was not a government program). They estimated that the replacement of the current social benefits system by the UBI in Finland would either be too expensive or would mean insufficient benefits for the most deprived and, consequently, an increase in the share of people below the poverty line from 11.5 to 14.3 percent!
The second economic problem with UBI is the negative impact on the labor supply. Economic analysis clearly suggests that an increase in non-wage income shifts the budget constraint line up and increases the reservation wage, which leads to a reduction in working time. And this is what the previous experiments with negative income tax, a concept similar to the UBI, showed — especially in case of women and youth, which were less attached to the labor market. The results are not surprising given the fact that giving people money for nothing reduces the opportunity cost of not working.
There are ethical issues as well. Supporters of the UBI criticize the welfare state because it allegedly is not good for beneficiaries — this is because one has to sacrifice time and mental resources to receive the benefit. Such an approach turns the matter upside down, or it reflects the ingratitude Thomas Woods talked about in 2018. Helping people temporarily or permanently unable to work is characterized by the UBI supporters as something negative — as something that stigmatizes and constitutes a psychological burden. Yet welfare payments are, in fact, a privilege that the government (through society’s money) provides to needy individuals. (To be clear, I do not praise the government and I’m not a supporter of the welfare state, I’m just pointing out that welfare beneficiaries, well, benefit from welfare.)
Such a perverse perspective is, however, a consequence of the view that UBI should be a right, not a privilege. That is, supporters believe that everyone should have the right to taxpayer-provided income, regardless of their contribution and the possibility of earning on the market. The problem is that someone would have to finance this program, so UBI would still be the privilege of some people at the expense of others. One person’s right to a basic income means that someone else has to pay for it.
The idea of the UBI boils down to breaking the link between income and work, i.e., freeing people from the unpleasant necessity to earn. And here we come across several problems. First thing: who will do the needed, albeit low-paid jobs, since everyone will be emancipated from the yoke of work? Is it possible to eliminate the unpleasantness of work at all or is it just the reality of the temporal world? Will robots take care of our grandmothers? A likely outcome is a significant decline in the overall output of the economy — meaning impoverishment across the board.
Finally, supporters of the UBI claim it increases individual independence. We are told the UBI promises socioeconomic independence by freeing individuals from the tyranny of bureaucrats, bosses, husbands, and the capricious markets (one can see here an echo of utopian socialists). With money in your pocket, work becomes an option.
But there is a paradox that comes with the promise of socioeconomic independence: someone still must pay the UBI. So the dependence would not disappear — only people would become more dependent on Leviathan. Robert Nisbet writes in The Quest for Community that the desire for a sense of belonging does not disappear — if it cannot be realized within the family, neighborhoods, and regional communities, then the gap will be filled by the nation and centralized state. Are you sure this is what we want? Maybe the UBI is thus not merely a utopia we can’t afford, but it’s actually a dystopia?
In Europe, the danger of “Japanization”—a long-lasting economic stagnation accompanied by expansionary monetary and fiscal policies (Schnabl 2015)—is now discussed more intensively, as the stagnation in southern Europe continues and the ultraloose monetary policy of the European Central Bank (ECB) is widely expected to persist. Concerns about Japanization have been countered by the argument that after thirty years of stagnation the growth in Japan is high when calculated in the appropriate manner (Krugman 2015). This implies that Europe will have nothing to fear if the ECB continues its ultraloose monetary policy, something that is widely expected.
Meanwhile in Japan the question of economic and social decline is increasingly taken seriously. One of the oldest Japanese television programs Shinichi Hatoris Morning Show discussed why Japan is the big loser in the international community. The starting point of the discussion was a graph showing that since 1997 the real wage level in Japan has fallen by 10 percent while in all other Organisation for Economic Co-operation and Development (OECD) countries real wages have continued to rise significantly, in Sweden by almost 40 percent.
Figure: Real Wage Developments in Japan and Other Industrialized Countries
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Source: OECD. Calculated based on hours worked. After Shinichi Hatoris Morning Show. The show started with the statement that despite still being a world economic power Japan has become a cheap country, where tourists from low-income countries come to shop around. 100-yen shops (dollar stores in the US) have gained a prominent role in the lives of the Japanese as real wages have trended downwards. It is shown that in terms of the the average citizen's annual income Japan now ranks only nineteenth among the thirty OECD countries. In 1990, shortly after the bursting of the bubble economy, Japan was still ranked ninth. Young people are argued to no longer have any economic perspective or personal orientation. The most frequently mentioned career aspirations among pupils are found to be youtuber (men) and artist (women).
The search for the causes throws a spotlight on the system of lifetime employment. Payment in Japan remains based on the seniority principle instead of performance. The well-off older employees are argued to be reluctant to change. The older generation was loyal to the ruling Liberal Democratic Party, because they had experienced the period of high economic growth and still were benefiting from it. The elder generation was able to start families and could still expect respectable pensions. For the younger generation this is no longer the case. This is shown to lead to an emigration of qualified young workers because they find higher wages and better working conditions abroad, in particular in the IT industry.
The discussion of Japan's Abe government's possible economic policy mistakes does not take place on the show but in the commentary fields of social media. There, many Japanese's disappointment with the economic policy of the Abe government ("Abenomics") becomes apparent. Thirty years after the Japanese bubble economy burst, the expansive monetary and fiscal policies, which have been further intensified since 2013 under Prime Minister Abe, have not delivered the promised recovery.
Instead, average real economic growth has remained stuck close to an average of around 1 percent per year since 1990. Real interest rates on savings have been close to zero since 1996. Real wages have been falling by an average of half a percent per year since 1998. Irregular employment (fixed-term, part-time, or temporary) has increased from 19 percent of total employment (8 million people) to 38 percent (21 million) between 1989 and 2018.
There is rising concern in Japan that everyone may end up equally poor if the economic policy remains unchanged. The economic and social decline frustrates the otherwise patient and polite Japanese. On social media, a term describing Abenomics as "Ahonomics"—stupid economic policy—is floating around. As fiscal and monetary policies in Europe converge toward Japan, only the future will show whether Europe meets a similar fate, with a similar discussion about the decline of Europe setting in.
References Krugman, Paul. 2015. "Rethinking Japan." New York Times, October 20, 2015.
Schnabl, Gunther. 2015. "Monetary Policy and Structural Decline: Lessons from Japan for the European Crisis." Asian Economic Papers 14, no. 1: 124–50.
Listen to the Audio Mises Wire version of this article. What does it take to fire a cop? In comparison to several other high-profile cases in which a police officer has killed someone on video, things have moved remarkably fast in the George Floyd case. The other four officers involved in his arrest were fired from the Minneapolis Police Department the following day. By comparison,
Fellow Minnesota officer Jeronimo Yanez, who on July 6, 2016, shot and killed Philando Castille in his vehicle after Castille informed him that he was armed, was not relieved until after he was acquitted for manslaughter and reckless discharge of a firearm on May 30, 2017. He was given a $48,500 buyout to leave the St. Anthony department.Cleveland officer Timothy Loehmann, who shot twelve-year-old Tamir Rice on November 22, 2014, was also fired on May 30, 2017. However, his firing was due to withholding information on his job application rather than killing a child who held an airsoft gun.NYPD officer Daniel Pantaleo, who killed Eric Garner over not paying taxes on cigarettes, was not fired until August 19, 2019, a full five years after the latter’s death on July 17, 2014. He plans to file an appeal to get his job back.Philip Brailsford, who shot Daniel Shaver while he lay prone in the hallway of a hotel in Mesa, Arizona, on January 18, 2016, was fired in March of that year. However, he was reinstated in August 2018 for forty-two days in order that he could be medically retired for PTSD (due to his shooting of Shaver) and receive a $2,500 monthly pension. What I would like to emphasize here, however, is that a police officer being fired is often not the end of the story. Even though the officers involved in Floyd’s death have been fired, they may not stay fired. Many officers, through their collective bargaining agreements and statutes, enjoy the right to appeal their termination to independent arbitration, which often results in their reinstatement.
Mark Iris, a researcher at Northwestern, studied years’ worth of police arbitration decisions in Chicago and Houston and found that in both cities arbitrators overturned disciplinary decisions half the time. Tyler Adams analyzed every published arbitration decision regarding a police officer’s discharge between 2011 and 2015, finding them overturned 46.7 percent of the time. One notable finding from Adams’s research is that an officer’s disciplinary record was raised by one or both parties in nearly every analyzed decision, with those with positive work histories being more likely to be reinstated than those who without them. A potential difficulty with this is that many police union contracts require that misconduct be removed from an officer’s record after a certain period. According to Stephen Rushin’s analysis of one hundred seventy-eight of the largest cities’ police union contracts, eighty-seven (including Minneapolis’s) contain such provisions. Some, such as that of Columbus, Ohio, even prohibit the use of an officer’s history as a factor in determining the propriety of disciplinary action in later investigations.
The ability to appeal to arbitrators has led to many questionable reinstatements. One was Pittsburgh officer Paul Abel, who on one night in 2008 consumed four beers and two shots of liquor. After leaving his wife’s birthday party, Abel claimed to have been sucker-punched in his car while at a stoplight. He retrieved his Glock from the trunk of his car and drove in pursuit of his attacker. Driving around the block, he spotted Kaleb Miller, whom he knew from the neighborhood and believed to be the person who had punched him. Abel then pistol-whipped Miller on his neck and accidentally shot him in the hand. Witnesses testified that the assailant who punched Abel was not Miller. Despite being arrested and fired, Paul Abel successfully appealed his termination. In this respect, Abel is not alone among Pittsburgh police officers:
In December 2009, Eugene It is interesting to note that Paul Abel and Eugene Hlavac were, respectively, the ninth and first most highly paid employees of the city of Pittsburgh in 2012, according to the Pittsburgh Business Times. was accused of slapping his ex-girlfriend (and his son's mother) so hard that he dislocated her jaw. And in November 2010, Garrett Brown was accused of running two delivery-truck drivers off the road in a fit of rage—an allegation similar to those made against Brown in at least one other late-night traffic encounter.
Each of these men, who were all Pittsburgh Police officers at the time of the incidents, shares a common experience: They all were fired, charged criminally, cleared of those charges…and then got their jobs back through arbitration. And they're not alone. Nine officers were fired by the city between 2009 and 2013, but five of those terminations were overturned by an arbitrator….In cases where terminations were appealed by the police union through arbitration, officers got their jobs back close to 70 percent of the time.
We should expect that the officers involved in the arrest and killing of George Floyd will also appeal their termination. Should they be unsuccessful in this, however, they may be able to find employment as police officers elsewhere. Although most states have some kind of standardized training and licensing of police officers, decertification of fired officers can be notoriously difficult, leading to the phenomenon of the “wandering officer” who goes from department to department. I will discuss this in a future post.
United States jobless claims have picked up, since the elections and the second wave of coronavirus have slowed down the economic recovery. Uncertainty about tax increases and changes in labor laws, including an increase in the minimum wage, add to the fear of new lockdowns, as employers see the devastating effects of these lockdowns in European employment.
While the United States has been able to recover fast and reduce unemployment to 6.8 percent, the eurozone jobless rate has risen to 8.3 percent before we consider the large number of furloughed employees who remain idle. The second wave of coronavirus in Europe has seen new government-imposed lockdowns and the impact on the economy is already severe. Estimates for the fourth-quarter gross domestic product assume a double-dip recession and another increase in unemployment.
Misguided lockdowns have created a deep and long-lasting impact on the economy and a dramatic social crisis, proving again that the response to the pandemic should have been similar that of Asian countries, which have successfully preserved health and the economy.
Employers all over the United States fear that a Biden administration will impose lockdowns, following the example of some European countries and thus generating a new decline in the economy and a wave of bankruptcies and job losses. Instead of giving simple and effective protocols for business to endure the crisis, some governments, whose members are completely disconnected from the day-to-day problems of small businesses and employers, resort to the drastic and ineffective measure of lockdowns, because it gives more power to governments and because the large corporations do not feel the impact as much as small enterprises. Governments like the idea of lockdowns, because it gives the impression of taking drastic measures to control the pandemic when, in reality, lockdowns simply destroy the business fabric and have proven to be extremely ineffective at reducing the mortality or hospitalization rates. The concerns about a Biden-enforced nationwide lockdown are not exaggerated. Dr. Michael Osterholm, a coronavirus advisor to Joe Biden, said a nationwide lockdown of four to six weeks would help bring the virus under control in the US and revive the economy. I am sorry to say that experience has shown us that none of those two things will happen. Massive lockdowns did not help European countries control the virus, rather the opposite, and have destroyed the economy with long-lasting implications for jobs, bankruptcies, and wages. Meanwhile, countries that have not implemented lockdowns and have provided simple and effective protocols have achieved better results in health and the economy.
Many citizens in the United States ask themselves if the country will recover its record level of employment and its low unemployment rate of 3.5 percent seen in March 2020, before the pandemic. Even if the United States avoids government-imposed lockdowns, which would delay the job recovery for at least another eighteen months, there is grave concern about the likelihood of more regulation, union control, and higher taxes that will make it more expensive to hire personnel and more burdensome both in terms of hiring as well as reducing payroll.
The United States has been an example of job creation during the growth period but, more importantly, rapid job recovery in a complex crisis like the covid-19 one. Adding rigidity to the labor market and increasing taxes will prove disastrous for small and newly created business, which are the largest job creators in the United States.
It is as simple as this. The United States cannot have the wage growth and low unemployment it deserves by copying the labor market legislation of Greece, Spain, or France, countries with extremely rigid job markets and high union intervention…and historically high unemployment.
The European Union used to have the same unemployment rate as the United States. Massive disincentives, a misguided excess of regulation, and heavy taxes have created a divergence by which unemployment in Europe stands at almost twice the rate as in the United States.
The fallacy of “protecting workers” with high taxes to employers and heavy intervention in the labor market only protects governments. Unemployment is higher, wage growth is weaker, and the flexibility loss means lower opportunities for youth employment. Youth unemployment in the eurozone and European Union is simply unacceptably high even in growth periods, and it is due to the barriers to employment created through aggressive intervention in the job market and government control. Incentives to hire are poor while disincentives to work are high.
If anything has been proven by the past two decades, it is that more government, higher taxes, and union intervention do not protect workers, they perpetuate unemployment and reduce wage growth and opportunities.
Lockdowns added to higher taxes and labor rigidity would likely prove very negative for the United States recovery. You cannot recover if you impose the burdens that some European countries have imposed. Labor market interventionism does not protect workers, it empowers politicians.
The American public school system fell apart this year. The overwhelming majority of American parents found themselves remote schooling from home. No consensus exists on whether or not schools should reopen, or whether they should reopen only after everyone attending gets vaccinated. Because teachers still get paid no matter what happens, anger and vitriol between parents, teachers, and other parents has increased to a point where the social fabric children lived in a year ago is ripping apart.
A Broken Model We can only solve these problems by returning to a true marketplace for schooling. We need to admit that the public school system model has failed. It only marginally worked under the assumption that enough parents worked the same hours and paid enough money in property taxes to keep the system up and running. However, without a societal norm in terms of who can work from home, who needs to work on-site and therefore needs in-person childcare, and who even has a job, only a relatively free market can possibly match the many different needs parents have right now.
The public school system was established less than two hundred years ago, and over the last hundred years, the state has increasingly inserted itself into the realm of raising children. States do not generate anything, merely redistribute it; and when they began to offer “free” childcare and education it came at the price of buying into a system increasingly difficult to opt out of.
Nationally, the United States spends an average of about $12,000 per year per student in the K–12 public school system. The average tuition for private schools nationwide is also about $12,000. Meanwhile, the parents who choose to pay for private schools pay twice. They pay tuition for their own children to attend the schools of their choice, and then they pay taxes for everyone else’s children to be educated as well.
Many people cannot afford this, so without a functional public school system, where does this leave them?
Public Schools Are AWOL, So Many Must Turn to Homeschooling Homeschooling needs to be presented as a viable alternative for low-income families. I am currently in my ninth year of homeschooling. I spend between $500 and $700 a year on materials for three children. Of course, I have lost a lot of income by leaving my job in order to homeschool. When I quit my job to care for my children full time, I had been making about $40,000 a year. So, one could say it costs me approximately $16,700 a year in lost wages, per child, to homeschool.
However, it gets more complicated than that. I do not have to buy work clothes. I do not commute. My kids can wear thrift store clothes. I spend a fraction of what my former coworkers do on food, because I can cook from scratch. When my children were little, I had no time for anything besides childcare; now that they are older, we have a little hobby farm which produces much of the food we eat, as well as providing entertainment. Homeschooling can make it easier for parents to work part time. If I need to do school later in the day to take a lamb to a processing plant, or squeeze in our schoolwork earlier so my children and I can process chickens in the afternoon, I can do that.
Household finances consist of ins and outs. When you choose to homeschool, you may bring in far less in terms of lost wages, but you will also send far less out the door in expenses. If your wages have gone to zero due to lockdowns—and resulting involuntary job loss—then it costs you nothing in terms of lost wages to homeschool.
Women Are Heavily Impacted by Lockdowns Millions of people lost income in 2020. There were 2.2 million fewer women in the workforce in October 2020 than in October 2019. Much of this has to do with the nature of jobs crushed by the covid-19 response. Women tend to work more in service positions. For example, in restaurants, as of 2017, while 52 percent of restaurant employees overall were women, 71 percent of the servers were women. Servers are some of the first people let go when restaurants have to shift to curbside pickup and takeout. Many of these jobs may not come back.
In our chaotic political environment it’s hard to predict which businesses will be allowed to bounce back and which will not. In addition to market uncertainty, there is also uncertainty over whether or not school will even be open for children who have not received the experimental covid vaccine. This would necessarily exclude many children whose parents are understandably not convinced of the vaccine’s safety.
The only certainty is that children grow up regardless of whether or not their parents have a plan. Homeschooling allows parents to exert control over the family’s schedule, finances, and medical decisions.
The American government grew dramatically in 2020. The Biden/Harris administration has never feigned interest in shrinking the size of the government; we can probably assume most of last year’s destruction of small business will continue. With the destruction of small business, so goes much of the control individuals have over how they bring money into the household. However, we can still control what goes out, and choosing to homeschool can help families save money and provide children an education that aligns with their values. More importantly, it sends the message to government bureaucrats that we do not need them to raise our children.
Listen to the Audio Mises Wire version of this article.
In recent years a number of economic studies have concluded that small to moderate increases in the minimum wage do not necessarily cause a discernible decline in employment. Social activists have seized on these findings to argue that there are no job losses and that it is possible to increase mandated wages by almost any amount without ill effects. The result has been a rush to raise the minimum wage to $15 in a number of states and cities and now at the national level.
The reality is that there is little consensus among economists about the effects of the minimum wage on aggregate employment. In their 2014 book What Does the Minimum Wage Do? Dale Belman and Paul Wolfson survey over two hundred minimum wage studies and conclude that moderate increases can raise the wages of low-income workers without significant employment effects. A 2019 paper by economist Jeffery Clemens is a shorter survey of many of the same studies. It concludes that the case for large increases (an increase from $7.25 to $15 would qualify) “is either mistaken or overstated” and adds that “[i]n contrast to the research emphasized by advocates, the broader body of work regularly finds that increases in minimum wages cause job losses for individuals with low skills.”
In a January 2021 study, economists David Neumark and Peter Shirley assembled “the entire set of published studies in this literature” and conclude that “there is a clear preponderance of negative estimates“ and that the evidence is particularly strong for teens, young adults, and the less educated—exactly the results economic theory would predict.
In the face of competing complex statistical analyses that may reach contradictory conclusions, voters and legislators should be aware that findings about the effects of wage increases on the unemployment rate often ignore or obscure other significant consequences. For example, small increases don’t always have a discernible effect on employment, because employers try to make other adjustments before laying off workers they are happy with and need. One of the first adjustments is to raise prices, the success of which depends on the competitive environment and the flexibility of demand for their products or services.
Along with price increases, employers may reduce hours, and Belman and Wolfson note that “[i]t has long been suggested that employers may respond to minimum wage increases by reducing spending on training, fringe benefits and working conditions valued by employees.”
Another important finding is that employers often respond to higher mandated wages by replacing low wage workers with those who have more education, skills and experience which make them more productive. This adjustment may have little effect on the observable employment numbers, but the effect is devastating for those who are replaced. Employers can be forced to pay higher wages, but they can’t be forced to hire or retain employees whose contributions don’t match the higher wage.
Some studies (see Clemens 2019) suggest that the pace of job creation slows when mandated wages rise. The increases also accelerate automation, which reduces the number of entry-level jobs and further penalizes those whom the increases are meant to help. In coming years, the combined effect of substitution, slower job creation, and accelerated automation is likely to be a growing core of workers, many of whom are young and poorly educated, who are unemployed and unemployable.
Social activists and progressive editorial boards now regard the minimum wage as another welfare program that can reduce the costs of programs like Medicaid and food stamps, and can reduce inequality. But the minimum wage is very poorly targeted for these purposes. The Congressional Budget Office estimates that “roughly 40 percent of workers directly affected by the $15 option in 2025 would be members of families with incomes more than three times the federal poverty level.” If the goal is to aid low-wage households, rather than teenagers and other part-time workers in middle-income and affluent families, expanding the Earned Income Tax Credit would be far more effective, because it is designed to aid the working poor.
The national minimum wage was established in 1938, and along with periodic increases has become widely accepted as desirable public policy. But it has also become a textbook example of the failure to think separately and equally about ends and means. If there is a public consensus that low-income families should receive additional aid, that policy should be paid for by the public, not by private businesses, many of which will try to offset the higher costs by raising prices to consumers and cutting employee hours and benefits, and some of which won’t survive with higher mandated costs that they can’t adequately offset.
The notion that third parties can pick the right starting wage for every employee, in every job, in every business, in every industry is folly. Those who support increases in the minimum wage do so with the best of intentions, but they should be aware of the substantial hidden costs and negative consequences which are often ignored in the public debate and should be aware that there are much better alternatives for helping those in need.
The family provides enormous economic advantages to daily life and civilization as a whole. But the extended and even nuclear family have been eroding thanks to changes in government policy, economic trends, and culture. In this article, I highlight how the nuclear and especially extended family supercharge human productivity thanks to the specialization and division of labor found within them.
Every household, whether it consists of one adult or many, has a long list of challenges it needs to constantly meet: earning income, taking care of children, house repairs, cooking, cleaning, doing laundry, etc.
People can achieve a level of productivity beyond the sum of their individual productivities by coming together to form families. One reason is because specialization and division of labor increase efficiency through a variety of mechanisms. Robert Murphy’s excellent textbook Lessons for the Young Economist details these mechanisms.
Natural and Acquired Aptitude One mechanism is called “natural aptitude.” Some people are just born better at performing some tasks than other people. We have different talents. When people live separately, while they only have to cook for one person, earn income for one person, do the laundry for one person, etc., they must learn to do a little bit of everything.
Contrariwise, in a family where one spouse is better than the other at earning money, making repairs, or teaching the children algebra, etc., total productivity is maximized by having that spouse exploit their natural aptitude to the fullest by focusing on the tasks they’re better at, as opposed to everyone performing a bit of every task irrespective of talent.
Similarly, specialization also increases productivity because of “acquired aptitude.” The more you work at something, the better you get at it. It’s difficult for a person living alone to achieve as much skilled specialization because they have to divide their efforts over a larger number of responsibilities. However, a family can exploit acquired aptitude by dividing the responsibilities among themselves and diving deep into their respective portion of the duties.
Time between Tasks and Economies of Scale The next advantage of specialization and division of labor is that, because each individual sticks to a smaller quantity of tasks, they spend less time transitioning between various tasks. Murphy explains:
Picture something as simple as three children cleaning up the table after dinner. Most likely, the kids can get the job done more quickly if they divide up the tasks and specialize, for the simple reason of cutting down on unnecessary walking. For example, one child can scrape the plates off into the garbage and carry the dishes to the sink. The second child can wash, and the third can dry. This system is much more efficient—they will all be done much sooner—than if each child grabbed a dish, scraped it into the garbage, then carried it over to the sink and washed it, then stepped to the right to dry the same dish and finally put it away. The same principle applies to other productive operations.
Beyond washing the dishes more quickly, another way that many families reap this benefit is by saving on commutes, which in the dishwashing example above is the unnecessary walking.
Two individuals living apart both have to both perform household tasks and commute to work. However, when two people form a family, having one devote themselves to housework and the other to earning an income outside of the home can reduce the total time spent commuting, the number of cars needed, and the amount spent on fuel.
Yet another benefit of the division of labor available to families but out of reach of people living on their own is economies of scale, which means that “a doubling of inputs more than doubles the output.” Cooking spaghetti for a clan of thirty takes longer than cooking for a lone man in his apartment, but it doesn’t take thirty times longer, and in this way is more efficient.
Murphy provides an additional example of this principle, “Whether you want to make one cup or four, the prep work is largely the same, which is why people often ask, ‘I’m making coffee, anyone else want some?’”
We’ve outlined a number of ways families increase economic productivity: natural aptitude, acquired aptitude, less time lost alternating between activities, and economies of scale. Before moving on, note that in each of these cases, the benefits tend to intensify as the number of people in the family increases, because with more people, each person can specialize more deeply in a smaller quantity of tasks. The real-world takeaway is that extended families tend to benefit from the division of labor even more than nuclear families.
Divorce versus Specialization Societies with an increased likelihood of divorce work against these benefits of specialization and the division of labor. That is, in a setting where divorce is regarded as unlikely, it is more likely the benefits of specialization will persist over time.
This can affect the perceptions of married persons and can affect how each person sees the potential value of "investing" in specialization within the family. On the other hand, in a setting—either general to society or specific to the marriage—where a spouse anticipates that a marriage is more likely to end (especially during childrearing years) the risk of overspecializing rises. In these cases, it is more likely that a spouse will avoid the same degree of specialization, because in the event of divorce, both spouses will need to be ready for a life of relative autarky. As divorce courts have long acknowledged, a spouse who gives up a wage-earning career to pursue domestic pursuits can end up in a more precarious economic position.
It has long been known there is a correlation between single parenthood and poverty. Moreover, the United States has one of the world's highest rates of children living with single parents. And this share of single parent families has tripled since 1965. The cultural impacts of these trends are, of course, significant. But we almost must consider the economic effects. A society that places little emphasis on building families is also a society that abandons the many economic benefits of family life derived through the division of labor and economies of scale.
When we think of analyzing economic organizations, we generally think of firms and corporations.
But there is another organization that is just as critical to economic development: the extended family. Indeed, the advantages offered by this institution are numerous and include risk sharing, mutual aid, human capital building, social capital building, and resource complementarity and coordination.
Risk Sharing and Mutual Aid One of the most important roles of the extended family is to act as a risk-sharing organization. Life is unpredictable. In a nuclear family separated from the extended family, the parents only have one another to rely upon. A single accident, sudden illness, job loss, etc. reduces half of the productive capacity of this unit and can spell disaster for both spouses and their dependent children.
This is where grandparents, uncles, aunts, and even family friends and close neighbors serve a crucial societal function. The members of this large group can chip in when things are going well for them to help their family members who are going through hard times.
And those who contribute know that if one day it’s their turn to go through a rough patch, the rest of the extended family, with its large collective pool of resources, will be there to get them through it, too. This works like and is a supplement to insurance purchased on the market, except that in the extended family there’s an affectionate thumb on the actuary’s scale.
Moving from a small group like the nuclear family to a larger group like the extended family protects against risk, because while it only takes one misfortune for half of a nuclear family to be debilitated, it would be an unlikely coincidence for half of a thirty-person extended family to simultaneously be stricken by misfortunes.
The mutual-aid capacity of the extended family doesn’t just apply to extraordinary cases such as sudden illness, unemployment, or death, but also to everyday matters such as taking care of the very young and the very old members of the family. We see this, for example, in the familiar case of grandparents caring for and instructing their grandchildren when the parents are at work or running errands.
The extended family is like a company that provides health insurance, unemployment insurance, life insurance, childcare, and eldercare all in one and in which everyone on the board of directors loves you.
Human and Social Capital The benefits hardly stop there. The extended family is also an engine of human and social capital, that is to say skills and connections that boost the career opportunities of its members.
Imagine a young man, Smith, who in addition to his parents has a grandfather who runs a vineyard, another grandfather who’s a carpenter, an uncle who owns a mechanic shop, another uncle who’s a lawyer, an aunt who’s a nurse, and older cousins with their own occupations and businesses.
To an outsider with no such relatives, each one of these occupational or entrepreneurial paths is to varying extents a black box. Is this the right path for me? What skills do I need? How do I get started? Who do I need to talk to? And so on.
But for Smith, each of his relatives can provide an apprenticeship opportunity and be a fountain of insider knowledge and connections. The extended family members in question can offer advice, describe what the occupation is like, take him in as an intern and teach him the craft, recommend him for job openings, or hire him themselves. All of this can save Smith a world of time, money, and anxiety and missteps.
According to Julia Fisher, the director of education research at the Clayton Christensen Institute, “Research shows that 70% of all jobs are not published publicly on jobs sites and as much as 80% of jobs are filled through personal and professional connections.” This shouldn’t come as much of a surprise. Parents pay large sums of money for their children to make the social connections provided by elite universities, for example.
Having a devoted extended family presents many of the advantages of a vocational school, country club, or recruitment agency.
Complementarity of Resources In a prior article I discussed how specialization and the division of labor make the family a powerful economic unit. Jörg Guido Hülsmann provides an insight about resource complementarity within the family that extends this analysis:
The generations are also different; they also complement each other. Young people typically have a large work capacity and creativity, but less experience and money. The cooperation between the generations of a family is also favored by trust and affection that has grown over many years, which still has to be built up in relation to people who are not family members.
The young and the old tend to have complementary resources within the family: energy and money, respectively. There may be plenty of people in the world ready to offer money to finance investments, and there may be plenty of people in the world ready to execute business plans once they have the money for it, but solving the coordination problem of bringing together these groups of people and fostering enough trust between them to breathe life into these potential investments is a herculean task. It’s part of the reason why there’s a multitrillion-dollar global banking industry.
Within extended families, the fact that the young and the old develop affection toward, trust in, and knowledge of one another helps solve this resource coordination problem. Consequently, investment ideas become actual investments.
Conclusion These benefits can’t be taken for granted, however. Merely having biological grandparents, aunts, uncles, cousins, etc. is not the same as being a part of a functioning extended family if this group of people is scattered across different states, or doesn’t labor to maintain warm relations and fulfill their reciprocal obligations toward one another. That’s up to us.
A correspondent sent me an argument I hadn’t heard before that concludes that it’s not morally permissible for libertarians to work for public universities, and in this week’s column, I’d like to examine that argument. To telegraph where I’m going, I don’t think the argument works, but even if I’m right, it doesn’t follow that it is morally permissible for libertarians to work in public universities. To show that requires much more than a refutation of one argument for its impermissibility.
The argument I want to look at, stated in the words of my correspondent is this:
One argument against accepting taxpayer's money is the good old fashioned ethical one that one never knows whether the work one is doing while accepting taxpayer's money would have been rewarded with the same amount of money by customers judging one's performance in a free market. If one is being paid more than what one would have received for services rendered in a free market then that person has simply become one of the exploiters, the people who make money through political means rather than private means (voluntary exchange). On the flip side, if one is being offered less money than what one would have received in a free market then one is being exploited for one's services. It is extremely rare to get exactly the market price for one's services. What is even worse, it is impossible to know whether one is among the exploiters or the exploited because the market prices e.g. for the service of conducting research or teaching students are themselves distorted by the presence of federal aid, research grants etc. Therefore it is best to avoid all those jobs that involve transactions with taxpayer's money.
To help you understand what the correspondent is saying, I’d like to offer this example: Suppose someone has a job at State Normal School X teaching “Anti-Market Ethics for the Mentally Challenged” and is paid $50,000 per year. Imagine that State Normal School X were instead a private university dependent entirely for support on donors and payers of tuition who freely gave or withheld money to the school. If the school hired the professor to teach the same subject, it’s unlikely he would get exactly $50,000. If a free market institution would pay him less, then he is exploiting others by earning more than the market price. And if the free market university wouldn’t employ him at all, his entire salary is exploitative. If the public university pays him less than he would have received in the market, then he is being exploited.
What is wrong with this argument? The correspondent is right than in a free market, businesses that want to make money do so by responding to the preferences of consumers. As Mises points out in Human Action,
The direction of all economic affairs is in the market society a task of the entrepreneurs. Theirs is the control of production. They are at the helm and steer the ship. A superficial observer would believe that they are supreme. But they are not. They are bound to obey unconditionally the captain's orders. The captain is the consumer. Neither the entrepreneurs nor the farmers nor the capitalists determine what has to be produced. The consumers do that. If a businessman does not strictly obey the orders of the public as they are conveyed to him by the structure of market prices, he suffers losses, he goes bankrupt, and is thus removed from his eminent position at the helm. Other men who did better in satisfying the demand of the consumers replace him…. The consumers determine ultimately not only the prices of the consumers' goods, but no less the prices of all factors of production. They determine the income of every member of the market economy. The consumers, not the entrepreneurs, pay ultimately the wages earned by every worker, the glamorous movie star as well as the charwoman.
Resources will shift from businesses that do not respond to consumer demand to those that do, but it does not follow that a business owner who adopts an unprofitable policy is doing something morally wrong. He has violated no one’s rights. People in a free market society are self-owners and owners of justly acquired property, and on that basis, they are free to engage in voluntary exchanges as they wish. This of course includes exchanges in which employers pay workers for their services. The employer and worker are morally at liberty to make any salary arrangements they want. If the result of the wage bargain differs from what it would have been if the business owner were fully responsive to consumer demand in allocating resources, that involves no violation of morality. The correspondent complains about those who receive a different wage from the one they would have gotten in the free market, but that fact by itself is ethically neutral, so far as I can see, and the language of “exploitation” insinuates a moral lapse that has not been shown to exist.
As often happens, Murray Rothbard gets the fundamental point right.
We have seen that in the free market economy people will tend to produce those goods most demanded by the consumers. Some economists have termed this system “consumers’ sovereignty.” Yet there is no compulsion about this. The choice is purely an independent one by the producer; his dependence on the consumer is purely voluntary, the result of his own choice for the “maximization” of utility, and it is a choice that he is free to revoke at any time.
I would like to avert a misunderstanding. Someone might object, “But isn’t it wrong to benefit from money forcibly extracted from people though taxation?” That’s an important objection to employment at public universities, but I haven’t addressed it at all in this article. I have dealt only with a different objection. It’s usually better to deal with one argument at a time. That is often the best path to clarity.
One of the things people tend to appreciate throughout the year, and especially during the Christmas season, is statutory holidays. These days off are taken for granted by many, and few people stop to think about whether they have any drawbacks. But as any good economist will tell you, everything comes with tradeoffs, and holidays are no exception. The trick, then, is to figure out where the cost lies, and who, ultimately, is paying it.
The True Cost of Statutory Holidays At first blush, it may be tempting to assume that our employers are the ones taking the hit. After all, they are losing productive work hours from their employees. And if all else were equal, that would certainly be correct. Shareholders, ultimately, would bear the cost of this lost productivity.
In most cases, however, things are not that simple. Consider, for example, a world in which there are no statutory holidays. Let’s say there’s a worker in this world who gets twenty paid holidays per year as part of their compensation. Now, let’s say the government introduces ten new statutory holidays, so every employer is now mandated to give their employees a minimum of ten days off per year. What happens?
Clearly, the employer is not going to give their worker ten additional holidays. After all, the government didn’t say it had to be ten more than what the worker was given in the past. They just said it had to be at least ten. The most likely scenario, then, is that the employer will give their worker the ten statutory holidays and ten additional holidays, so that they break even at twenty days per year.
The reason the employer will gravitate toward the same number as before is because of market forces. Time off, like salary, is part of the “price” of labor, and as such, it is determined by supply and demand. Thus, days off tend toward an equilibrium point determined by the market, just as salaries do.
The introduction of statutory holidays can therefore be likened to the introduction of a minimum wage. To the extent that the market “rate” is already higher than the mandated minimum, the new law has no effect on the level of compensation. And since almost all employers give more days off than they are required to by law, it seems clear that market forces, not statutes, are determining the total number of holidays most workers get.
The implication, then, is that the total number of holidays will gravitate toward the market “rate” regardless of whether some of those holidays are mandated or not. Thus, more statutory holidays just means fewer regular holidays. So really, the hidden cost falls entirely on the worker.
The Value of Flexibility “Fair enough,” you might say. “But if they still break even, what’s the big deal? Isn’t the worker just as well off in either case?” The answer here is no, because while they may get the same total number of days off, their flexibility regarding when they can take those days is significantly curtailed.
Going back to the salary analogy, we’ve already established that if a worker gets paid, say, $20 per hour, a minimum wage of $10 per hour will not make any difference to their total pay. But imagine that instead of simply mandating a minimum of $10 per hour, the government also mandated how that $10 would be spent.
Clearly, this is harmful for the worker. Whereas before they could choose how they spent their entire salary, now they can only choose how they spend part of it, and the part that they can’t control will invariably be spent on things they consider less important than what they would have spent it on themselves. The same logic applies to holidays. If there are ten statutory holidays per year, that’s ten days that can no longer be allocated by the worker.
The reason that flexibility is so important is because the value of time off largely depends on when it’s taken. Imagine your kid gets sick or there is a death in the family. Those are times when days off are more important. But if half of your holidays are fixed by legislative fiat, you lose the ability to use that time when you actually need it. You are forced to “spend” those days on time that is less valuable, which means you can’t spend them when you really need them.
Vacations are also curtailed because of statutory holidays. Since the timing of the mandatory days is rigid and spread out, it’s impossible to use that time off for longer trips that take multiple consecutive days, even though that may be preferable to a series of long weekends.
Of course, if people want to take certain special days off like Thanksgiving or Christmas, they can still choose to do that. But forcing people to take certain days off against their will only pushes them away from their optimal holiday allocation, just like forcing people to spend money on certain things pushes them away from their optimal capital allocation.
If we really want to help workers, then, statutory holidays should be repealed. Said differently, workers should have the freedom to take their time off when they need it most.
One of the challenges in looking at income and wealth data is getting a sense of how different demographic groups are affected.
It's relatively easy to find median income and wealth data over time for the entire population, for example. But then problems of interpretation immediately present themselves. For example, if the data is household data, what are we to make of things if the household compositions has changed over time?
And what if the demographics of the individuals within the households themselves have changed? For example, if a larger proportion of all households are now younger households, perhaps that could have an effect on the income and wealth data overall.
After all, younger heads of household tend to have lower incomes and less wealth than older heads of households.
This problem of measuring workers and incomes over time has been the challenge that presents itself to anyone trying to figure out if so-called millennials are richer or poorer — as a group — than other age cohorts.
To do this, researches must find some way to estimate wealth and incomes for different age cohorts at similar ages or at similar points in their careers. Otherwise, characteristics we think we are attributing specifically to Millennials may really be characteristics that are just common to people of a certain age.
Last week, the Board of Governors of the Federal reserve released a new report that attempts to address the issue of whether or not Millennials really are worse off at the same point that other age cohorts have been at similar ages.See "Are Millennials Different?" by Christopher Kurz, Geng Li, and Daniel J. Vine. in Finance and Economics Discussion Series Divisions of Research & Statistics and Monetary Affairs
Federal Reserve Board, Washington, D.C. (https://www.federalreserve.gov/econres/feds/files/2018080pap.pdf)
This will no doubt be the first of many that attempt to answer this question. At this early stage, however, we can say that the data leans toward concluding that yes, Millennials are, in fact, less wealthy, and are lower-income than previous cohorts.
Some conclusions in the report include:
"Specifically, the real average full-time labor earnings of a millennial male household head in 2014 were about the same as those for a comparable male Generation X household head in 1998 and over 10 percent lower than those for a comparable male baby boomer household head in 1978.""For female heads of all households, real average full-time labor earnings increased moderately between 1978 and 1998 and between 1998 and 2014, reflecting, in part, rising female educational attainment. However, the median labor earnings of female millennial household heads in 2014 were about 3 percent lower than those of comparable female Generation X household heads in 1998.""[A]verage real labor earnings for young mal e household heads working full time are 18 percent and 27 percent higher for Generation X and baby boomers, respectively, than for millennials after controlling for age, work status, and a n umber of demographic variables. For young female heads of household working full time, these generational gaps in labor earnings are in the same direction but somewhat smaller—12 percent and 24 percent, respectively. For family income, the regression shows that Generation X and baby boomer households have a family income that is 11 percent and 14 percent higher, respectively, than that of demographically comparable millennial households." A popular narrative around Millennials has been that they have higher debt loads. The Fed report, however, concludes Millennial debt levels are slightly lower:
The real average total debt balance was around $49,000 for Generation X members in 2004 and about $44,000 for millennials in 2017.
Moreover, according to the report, "millennials also have significantly less credit card loans and miscellaneous other debt."
The problem we encounter here, though, is that the debt the Millennials do have is not connected to assets. For example, fewer Millennials have mortgages, which, given lower homeownership rates, suggests Millennials have less home equity as part of their net worth totals:
In 2004, 28 percent of Generation X members had a mortgage, well above the 19 percent share of millennials that had one in 2017. ... That said, the median mortgage balance for millennial mortgage borrowers in 2017 was somewhat higher than for Generation X mortgage borrowers in 2004 ($105,000 versus $94,000), reflecting, in part, the net in crease in real house prices during the same period.
Instead, debt seems to be more connected to student loans and to auto debt. For example:
For auto loans, contrary to the stories in the popular press th at millennials have a more subdued demand for cars than members of earlier generations, the Equifax/CCP data show that 40 percent of millennials had an auto loan in 2017, compared with 36 percent of Generation X members in 2004. The mean outstanding balances on auto loans in the two cohorts are similar at about $5,200.
And, as many suspected, student debt is higher for Millennials:
One loan category for which millennials in 2017 had a notably higher average balance than Generation X members in 2004 was student loans. While only 20 percent of Generation X members had a student loan balance in 2004, more than 33 percent of millennials had one in 2017. Moreover, the median balance among student loan borrowers was substantially higher for millennials in 2017 than for Generation X members in 2004 (over $18,000 versus $13,000). ... Accordingly, the average student loan balance for millennials in 2017 was more than double the average loan balance for Gene ration X members in 2004. The rise of student loan borrowing among young consumers reflects, in part, the rising real cost of higher education, the increase in college enrollment due to the Great Recession, and the increasingly limited capacity of parental contribution.
Thus, it's not surprising when the report concludes that Millennials have a lower net worth than other age cohorts at the same stage:
Turning to net worth, which puts together the asset and debt comparisons described above, we find that millennials in 2016 have substantially lower real net worth than earlier cohorts when they were young. In 2016, the average real net worth of millennial households was about $92,000, around 20 percent less than baby boomer households in 1989 and nearly 40 percent less than Generation X households in 2001.
The median total assets held by millennials in 2016 is significantly lower than baby boomers in 1989 and only half as big as Generation X members in 2001.
Overall, the report paints a picture of younger workers who have fewer assets, lower incomes, and more student debt.
A common response in the media has been to blame Millennials for buying "too much avocado toast," or for having too many other luxury tastes that render them incapable of building wealth. That may be true of the minority of Millennials who spend much of their lives on Instagram, but the Fed report itself concludes that the consumption patterns of Millennials are not significantly different from those of other groups when incomes and other factors are taken into account.
In other words, Millennials are not any more profligate than the Baby Boomers or Gen Xers who came before them.
The Role of Modern Monetary Policy The report does not attempt to answer questions as to why Millennial might be unable to build wealth as quickly as those who came before.
But there is something different about today's younger workers: they mostly started their careers in the post-Great Recession world and have thus lived their working lives in the shadow of what Brendan Brown calls the Great Monetary Experiment.
First of all, these workers had to deal with the fall-out of the Great Recession itself which was widespread unemployment for a period of years. This meant slower income growth in the first several years of employment, which can have a long-term effect on wealth accumulation. Economists and other observers have been pointing this out since at least 2011, when it became clear that job markets and incomes were not going to just bounce back as many assumed they would at the time. Indeed, it has only been in the past few years that most measures of incomes and wages have returned to the levels we saw back in 2007.
And Millennials appear to have been hit especially hard by this, as noted in this report from the St. Louis fed.
All of this, of course, happened on the Fed's watch, and was just the latest example of how the myth of Fed-engineered economic stability has always been a myth.
So, we have a group of workers who start out their careers in a bad labor market, brought on by more than 20 years of money-pumping by Volcker (later in his term), Greenspan, and Bernanke.
But once those Millennials were able to get jobs, they then were faced with a world that was particularly hostile to saving, home purchases, and investment for lower-income workers.
Our current situation is marked by endless monetary activism marked of near-zero interest rates and asset inflation which rewards those who already own assets, and have the means to access higher-risk investment instruments that offer higher yields.
Meanwhile, banking regulations have been re-jiggered by federal politicians and regulators to favor established firms and the already-wealthy.
This was explored in some detail recently by banking-industry researcher Karen Petrou who concluded that thanks to post-2007 federal regulations, "it’s basically impossible for banks to make mortgage loans to anyone but wealthy customers."
Meanwhile, basic methods of saving, like savings accounts, offer interest rates that don't even keep up with inflation.
Combine this with rapidly climbing home prices, and we have a formula for an economic system where being an ordinary worker — who needs to build wealth from scratch — is facing low yields, less accessible debt, high housing prices, and lower incomes.
This, not surprisingly, has led to greater inequality, and its likely that as we look at growing inequality statistics, part of what we're seeing is a growing gap between younger workers and older ones — a growing gap that was not as wide before.
In this environment, doing what the Baby Boomers did, or doing what the Gen Xers did, just isn't going to work very well. It may very well be that the only way for Millennials to get ahead in the current economy will need to either inherit wealth or engage in "extreme frugality" in which the Millennials will need to adopt a drastically lower standard of living compared to their elders.
This was not nearly as essential for previous generations. Of course, for those Millennials who do decide to go the route of extreme frugality, they'll then be attacked for ruining the economy by "not spending enough." The smart ones won't care.
Three months ago, the CEO of Gravity Payments, a Seattle credit card processing firm, announced that all of the firm’s employees would be paid a minimum of $70,000 a year, according to this story. Now, the firm has fallen on hard times, and some of the firm’s “higher valued” employees have quit. One employee who quit said, “He gave raises to people who have the least skills and are the least equipped to do the job, and the ones who were taking on the most didn’t get much of a bump.” Another who quit said, “Now the people who were just clocking in and out were making the same as me. It shackles high performers to less motivated team members.”
The real-world Gravity Payments sounds a lot like the fictional Twentieth Century Motor Company from Ayn Rand’s novel, Atlas Shrugged, and while the quotations from the real-world employees who left Gravity Payments do not sound quite as passionate as the fictional John Galt, the message is the same.
Rand’s novel was first published in 1957 and has been continuously in print since. I am not the first to observe that many real-world events since the publication of Rand’s novel closely resemble events in the fictional world she described. Here is another example.
Listen to Ryan McMaken's commentary on the Radio Rothbard podcast.
Bloomberg reports this week that on Wall Street, men have started to implement office strategies that some managers and employees believe will minimize the likeliness of being accused of sexual harassment:
While the new personal codes for dealing with #MeToo have only just begun to ripple, the shift is already palpable, according to the people interviewed, who declined to be named. ... [Many of the men are] saying how uneasy they are about being alone with female colleagues, particularly youthful or attractive ones, fearful of the rumor mill or of, as one put it, the potential liability.
A manager in infrastructure investing said he won’t meet with female employees in rooms without windows anymore; he also keeps his distance in elevators. A late-40-something in private equity said he has a new rule, established on the advice of his wife, an attorney: no business dinner with a woman 35 or younger.
Not surprisingly, some advocates for female employees have protested, claiming they are being "iced out" of important meetings and are now "excluded from casual after-work drinks, leaving male colleagues to bond."
Nor is avoiding a lawsuit simply a matter of being more polite or less sexist, since that doesn't necessarily reduce the risk of false accusations.
Thus, for male workers who wish to reduce the risk of lawsuits, the key is often likely found in avoiding situations which could even lead to the very possibility of a lawsuit.
Avoiding the potential for accusations and lawsuits becomes all the more high stakes if male workers believe that they will not receive adequate due process in case an accusation is lodged.
That is, if a male worker feels he'll be entitled to his "day in court," so to speak, he might be willing to risk the appearance of impropriety or private settings which could lead to a he-said-she-said situation.
It's easy to see how in today's environment, though, that many male workers may conclude that even an accusation will be enough to ruin one's career.
In that case, understandably, they may be willing to go to great lengths to minimize risks.
The ADA Example: Hiring Fewer Disabled Workers to Avoid Lawsuits This isn't the first time we've seen this sort of dynamic at work.
Passed in 1990, the Americans with Disabilities Act was followed by a decline in employment for disabled workers for similar reasons.
The ADA mandated that employers provide "reasonable accommodations" to disabled employees, who needed assistance in performing job duties.
Employers that did not comply opened themselves up to lawsuits.
For this reason, it is believed, many employers sought to avoid lawsuits altogether by simply not hiring disabled workers.
The empirical data showed a measurable decline in employment for the disabled. According to the National Bureau of Economic Research:
Using data from the Current Population surveys for 1988-97, the authors find that the ADA had no effect on the wages of disabled workers, which are still approximately 40 percent below those of the non-disabled. On the other hand, employment rates for disabled men in all age categories, and disabled women under the age of 40, fell sharply after the ADA. This decline represents a clear break from past trends for both disabled and non-disabled workers, and therefore seems likely to have been caused by the ADA. Additional evidence for this claim is the finding that mid-sized companies show the most pronounced decrease in hiring the disabled. Large companies probably have sufficient resources to absorb compliance costs, according to the authors, while small companies are exempt from the ADA requirements. Also, in states with large numbers of ADA-related discrimination cases in previous years, fewer disabled people are hired afterwards. This too suggests that concern about costs from ADA provisions may have been driving the decline in disabled employment.
More recent indicators also indicate that employment among the disabled continues to lag. In fact, 27 years after the adoption of the ADA, researchers found that disabled people were making gains in most areas. But not in employment:
"My organization has been collecting data on disability going back to the mid-1980s when we did our first so-called gap survey, which reports on quality of life for people with and without disabilities and looks at the gaps," said Carol Glazer, president of the National Organization on Disability. "A number of gaps have been closing. Unemployment, unfortunately, is one thing that hasn't improved appreciably since we started measuring."
Keep in mind that according to the NBER report, there had been a downward trend in unemployment among disabled workers prior to 1990. It may very well be that the ADA stopped that trend in its tracks, and employment among the disabled has never recovered.
In practice, of course, the ADA essentially turned disabled workers into walking potential lawsuits. While, prior to the ADA employers had leeway in negotiating with disabled employees as to what accommodations might be made, the ADA replaced this with mandates under pain of legal action.
Under these conditions, even those employers who might be truly motivated to give more disabled workers a chance may think twice about endangering their businesses in this way.
This situation is made even worse by the vaguely defined nature of "reasonable accommodation," and the fact that employees and employers might disagree as to what constitutes "reasonable." Given the lack of any precision as to defining what might lead to a lawsuit, employers have likely taken to avoiding the issue altogether.
Wall Street, it seems, may have come to some similar conclusions about sexual-harassment lawsuits.
[Newsweek column from March 21, 1949, and reprinted in Business Tides: The Newsweek Era of Henry Hazlitt.]
Tablets, said to be 200 years older than the Babylonian Code of Hammurabi, have just been translated which show that the ancient kingdom of Eshnunna had wage control and price control. The news ought not to have come as a surprise. For the code of Hammurabi itself (unearthed in 1902), which was promulgated earlier than 2000 B.C., fixed prices, wages, interest rates, and fees. This makes price control at least about 4,000 years old.
The real economic discovery of civilization was the free market. It was Adam Smith, in The Wealth of Nations, published in 1776, who more clearly than any other mind up to his time glimpsed the marvels of the free market. In the first flush of his discovery he compared the system of free prices and free profits and losses to “an invisible hand” that led men pursuing their own interest to promote the welfare of the whole nation more effectively than when they deliberately tried to promote it.
It was in 1776 also that Gibbon, in The Decline and Fall of the Roman Empire, wrote: “When the luxurious citizens of Antioch complained of the high price of poultry and fish . . . the emperor [Julian] ventured on a very dangerous and doubtful step, of fixing, by legal authority, the value of corn. He enacted that, in a time of scarcity, it should be sold at a price which had seldom been known in the most plentiful years. . . . The consequences might have been foreseen, and were soon felt . . . The proprietors of land or of corn withheld from the city the accustomed supply; and the small quantities that appeared in the market were secretly sold at an advanced and illegal price.”
Sixty years prior to Julian’s venture, Emperor Diocletian, in A.D. 301, had issued a famous edict fixing prices and wages. The punishment for exceeding the prices fixed was death or deportation. “The edict was well-intended but abortive,” comments the Encyclopedia Britannica. “The actual effect was disastrous.”
Let our history skip now to 1793, when the leaders of the French Revolution, in a desperate effort to offset the consequences of their own reckless overissue of paper money, passed a law imposing price ceilings. It was in some respects more reasonable than our own OPA. It allowed prices to be one-third higher than in 1790; it permitted the addition of a 5 percent profit for the wholesaler and 10 percent for the retailer. But as Andrew D. White wrote in 1876: “The first result of the Maximum [price law] was that every means was taken to evade the fixed price imposed, and the farmers brought in as little produce as they possibly could. This increased the scarcity, and the people of the large cities were put on an allowance. Tickets were issued authorizing the bearer to obtain at the official prices a certain amount of bread or sugar or soap or wood or coal to cover immediate necessities.”
But even with this early rationing system the law “could not be enforced.” Shopkeepers “could not sell such goods without ruin. The result was that very many went out of business and the remainder forced buyers to pay enormous charges under the very natural excuse that the seller risked his life in trading at all. That this excuse was valid is easily seen by the daily lists of those condemned to the guillotine, in which not infrequently figure the names of men charged with violating the Maximum [price] laws.” Within a little more than a year the law had to be repealed.
The moral of our little history is familiar. It is that “those who cannot remember the past are condemned to repeat it.” For this is what our “modern” governments do today all over the world. Ironically, it is those who now wish to return to this ancient totalitarian device who are fondest of calling themselves “progressives.” They are also fond of saying that those who believe in economic liberty “are living in the nineteenth century.” These controlists have yet to learn that they themselves are still living, as the discoveries in Babylonia attest, in the nineteenth century—B.C.!
"In order to show that it is a half-truth, we must have recourse to long and dry dissertations."— Frédéric Bastiat
It's still a very prevalent view that employers are somehow exploiting the people who work for them when they draw a profit from their business, despite the fact that a person's employer is clearly doing more for their finances than all of the people who are not employing them. I might add, perhaps somewhat facetiously, including those keyboard-warriors who claiming that entering someone into employment is exploiting them.
It is true that workers do get paid less than the total value of what they produce, but that is because what they produce is made with other resources which have to be bought, and in a factory or work place which has a price and requires overheads to operate. The capitalist is responsible for paying for marketing and advertising to link the product to potential buyers — and at the end of the day, if the product doesn't sell, everyone else has already been paid but the capitalist walks away with the loss.
The capitalist lays out a vision of what he thinks will meet people's needs better than they are being met at present. This requires a particular expertise which is in itself a labour contribution over and above that of the other employees which is unique to the entrepreneur. If his vision is clear, indeed he will make a profit. If it is faulty, he will make a loss. This is not a necessary risk, absent the profit motive a rich person is more likely to buy a bigger house or go on a cruise. But the capitalist takes a risk now, and foregoes consumption, in hope that he will reap the benefit later. That is part of what he is being paid for.
Another part of what he is being paid for is the time between making the investment and getting paid for that investment. We would all rather have resources in the here-and-now than some time in the future, because the future is uncertain, that is why lenders can charge interest on money that they borrow. They are choosing to forgo a smaller amount of consumption now for a larger one in future. The workers get paid now, the capitalist gets paid later only after the product has sold, and only IF it is sold, after everyone else has been paid. Economist Eugen von Böhm-Bawerk explained that far from exploiting labor, the capitalist removes the burden of waiting for income from the workers. If they wanted to produce the goods themselves they would also have to wait until they could find a buyer before gaining a stable wage, and first save or borrow in order to accumulate the resources to buy a factory or workshop without the help of the capitalist.
Finally, it's worth mentioning that the capitalist is increasing the value of the worker's labor! If a man decides to try out the same manoeuvres which might get them somewhere in a factory out in a field it will not produce much of value to anyone else. Clearly workers can earn more working for their employer than for themselves otherwise they would simply declare themselves self-employed and get on with making a higher income. Perhaps some of them can earn more working for themselves but do not want to take on the responsibilities entailed which are currently met by the firm which employs them. This too is evidence that capitalists are providing value.
Marxists hold that capitalists simply skim their profits off the top while providing no value of their own — that they are "extracting surplus value" from their workers. But if that was true, non-profit organisations would just swoop in and undercut profit-making firms by eliminating the "dead weight" costs of paying a capitalist. They do not because they cannot. Capitalists are clearly providing some competence or vision which benefits their workers. Each benefits from the mutual exchange, as evidence by the fact that if the worker could get a better deal s/he would take it, and if the employer could find a better workers, s/he would hire them instead.
Ultimately, wages are not an arbitrary figure but a reflection of how much value an employee is able to provide to a customer. If a person wants to do away with an employer they can do so by learning skills, either on the job or on the side, which will allow them to work for themselves. Likewise, profits are not arbitrary but a reflection of how much value a company is providing on the marketplace. Provided, of course, that they are drawing their profits from serving the market place rather than lobbying or appealing to the state, but that is another article.
President Joe Biden in the state of the union address called for a $15 minimum wage along with pushing against and calling out corporations for spreading inflation. Raising the minimum wage, along with the fallacy that increased government spending brings growth, lies at the heart of the interventionist agenda.
As inflation begins to skyrocket, it's useful to understand, that the rising minimum wage has played its respective share in this event. A total of 74 states, cities, and counties raised their minimum wage during 2021, according to the National Employment Law Project, which is still tabulating the number for 2022 but expects it to be about the same. In Arizona, for instance, the minimum hourly wage in 2022 is $12.80, up from $12.15 this year. It inched up only 15 cents for 2021. The minimum hourly wage for workers in Colorado is $12.56 today, compared with $12.32 last year. And the minimum hourly wage in California has risen to $14.00, up from $13.00
The case advanced for a minimum wage relies on the macroeconomic reasoning where an increase in wages would lead to a rise in disposable income, and this increased disposable income would lead to increased expenditures which, through the multiplier effect, would increase the overall aggregate demand of the economy.
While this logic may seem sound in isolation, it is fundamentally divorced from the wisdom that the economy is an interconnected web of markets where each individual’s life is affected by the actions of all other individuals and every action has an immediate visible, and many invisible, effects. Therefore, when the income of already employed workers increases due to the increase of the baseline pay, the interconnectedness of labor markets would put upward pressure on every other market, which in due course leads to increasing costs to producers.
This higher wage cost leads them to raise their prices, which lowers the purchasing power of consumers. Most employers who employ minimum wage workers have competitive gross margins where rising costs without raising prices to cause them to lose their prior profitability which is their cushion against ever-present uncertainty.
Rising prices has its immediate impact on less-skilled people who spend mostly on fast-moving and non-durable consumer goods. They would experience inflation and find their budgets (i.e., real incomes) reduced because the increased demand which is generated as a result of the artificially increased wages would find its way through the market where it would be greater than the real supply.
Then arises the problem of unemployment. Most people view minimum wage as a base for every wage; therefore, when the base is increased, all other wages would increase too. But if we keep in mind the interconnectedness of markets, this idea inevitably becomes a fallacy.
Employers in an economy are continuously seeking to attract workers from other employers by bidding up wages and benefits for them. The wage of a worker is not an absolute measure of his value, but an indication of his relative value to the employer due to labor’s scarcity in the face of the employer's need, or demand. The employer seeks to pay the additionally hired worker in line with the additional productivity he would generate in the business.
The higher the general level of wages, the more the employer needs to bid to hire the additional worker, and the employer consequently must demand higher productivity. The minimum wage thus creates an obstacle over which the worker needs to jump to get the job in terms of his/her skill and productivity. This obstacle makes it more difficult for people to be employed as minimum wage increases, and as minimum wages are paid to either teenagers who are starting out their careers or to lower-skilled people. It becomes clear, then, that the higher the minimum wage, the more difficult it will be for them to get a job, which leads to a rise in unemployment in that demographic, which would otherwise experience lower unemployment.
While this effect of the interventionist scheme would be visible, there are also invisible effects that wouldn’t be noticed at first. These would take the form of decreased investment in growing areas with naturally high prices, while resources would be poured into artificially inflated sectors.
Prices play a key role in signaling coordination and efficient allocation of resources. When an object becomes scarce in the market, an increase in its price instructs consumers to economize on it while asking producers to employ their resources on increasing its supply.
But rising prices that take place due to an increased minimum wage destroy this efficient mechanism, as entrepreneurs must then invest where rising prices wouldn’t reflect true market conditions. This makes them lose out on profit opportunities by being misguided into spending on unprofitable areas.
Genuine market demand and scarcity still exist. The minimum wage thus acts as a signal which misdirects the employment of resources, leading producers to make inefficient choices and allocate resources erroneously.
Thus, an increase in the minimum wage causes unemployment for workers and makes consumers worse off as their real demands would remain unfulfilled, while the artificial price increase acts as a tax levied on them, reducing their purchasing power. Therefore, the call for doubling the minimum wage and expecting the companies to lower costs is a daydream which would hurt every sector of the economy, be it workers, consumers, or employers. At the same time, we should remember that the increased minimum wages which have taken place not backed by increases in real goods have contributed to the historic rise in prices seen today.
This article explores the concept of the Great Decoupling, or the supposed discrepancy between increased labor productivity and higher worker wages. Prior to 1970, increases in labor productivity translated into wage increases, just as economic theory dictates. However, it appears that since the 1970s, wages have barely increased or have increased much slower than productivity. What is the reason for this?
The Great Decoupling: Wages Are Not Growing as They Should Let us first provide a visual snapshot of the Great Decoupling. In this graph, prepared by the Economic Policy Institute and published by the World Economic Forum, we can see that wage increases went hand in hand with increases in labor productivity up until 1970. Since then, wages have practically stagnated while productivity has continued to increase. Graphs similar to this one can be found in many articles.
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Traditional economic theory tells us that a worker’s wage is determined by their marginal productivity. Productivity increases should translate into wage growth. Other issues must be taken into account; however, the basic principle holds true.
Explanations for the Great Decoupling What explains the Great Decoupling? There have been several flawed attempts to explain this problem. Those most critical of the market system have suggested that the decline of unions is responsible. The assumption is that workers have lost the ability to negotiate so that productivity increases have been appropriated almost entirely by employers and barely by workers.
Another explanation put forth by the enemies of capitalism is that the 1980s were a time of triumph for supply-side economics, liberalization, and deregulation, and large businesses were the main beneficiaries of these triumphs.
Those in favor of the free market have argued that the decoupling was caused by the end of the gold standard in 1971. The removal of a monetary asset external to the financial system led to constant monetary interventions to save companies, creating a market focused more on courting political favor than the favor of consumers.
What Is Causing the Great Decoupling? In 2007, the economist Martin Feldstein published a paper in which he masterfully explained that the Great Decoupling is an illusion based on two mistakes.
First Mistake: Wages versus Compensation
The first mistake is to focus on wages and not on workers’ total compensation. It is true that wages are almost stagnant in real terms (that is, after accounting for inflation); however, in recent decades, nonwage forms of compensation such as contributions to pension funds, private medical insurance, and Social Security have increased significantly.
In the graph below, we can see that wages almost completely uncoupled from worker compensation in the early 1970s, just when the Great Decoupling is supposed to have begun. Between 1964 and 2021, wages grew 17 percent in real terms, while worker compensation more than doubled. In other words, US workers are earning more in compensation although their wages have stagnated.
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Source: St. Louis Fed. The year 1964 was chosen as the base because that is when the series Average Hourly Earnings of Production and Nonsupervisory Employees began. Second Mistake: Deflating Incorrectly
The other mistake described by Feldstein is more technical.Economists talk about variables in nominal terms and in real terms. Any monetary variable faces the problem that prices are constantly changing, and unfortunately almost always increasing. If you were earning $10 an hour last year and are earning $11 an hour this year, your wage has increased by 10 percent in nominal terms. However, if prices have risen by 10 percent, your purchasing power has not increased at all. Therefore, your real wage has remained constant. Speaking in real terms simply means accounting for the effect of inflation on economic variables. Using the Consumer Price Index to deflate wages (that is, to account for inflation) is useful in some situations, such as when we want to know how workers’ standard of living is evolving. However, it is a grave mistake when analyzing the evolution of productivity and wages.
Companies are paid for what they produce, and workers are paid to produce, not to consume. Therefore, the GDP deflator, which includes all goods produced in an economy, is used to analyze changes in real production and productivity. But nominal wages are converted to real values with the Consumer Price Index, a much narrower index that includes only consumer goods. For the comparison between productivity and worker wages to be accurate, we would need to convert both measures to their real values using the same price index. Since we are not currently doing so, we are comparing apples and oranges.
The difference between the CPI and GDP deflator is enormous in the long term as can be seen in the graph below. The gap began to widen in the 1970s, which, again, is when the Great Decoupling is supposed to have begun. Consumer prices, measured by the CPI, have multiplied by more than 10 from 1947 to 2021. For their part, general prices in the North American economy, measured by the GDP deflator, have multiplied by 6.4 between 1947 and 2020. The difference is huge.
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Source: US Bureau of Labor Statistics. Calculating Real Worker Compensation Using the GDP Deflator If we use the GDP deflator to calculate both real worker compensation and real productivity, the picture changes drastically.
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Data are for nonfinancial private companies. Data that include the entire private sector are very similar to those presented here. Source: Prepared by the author with data from the US Bureau of Labor Statistics. Now we can see that real productivity has grown at almost the same rate as real compensation. From 1947 to 2020, productivity multiplied by 4.7 while worker compensation multiplied by 4.6. Therefore, neither the demonetization of gold, nor the fall of unionism, nor the deregulation and liberalization caused the Great Decoupling. In fact, nothing has caused it: it simply does not exist.
What If We Use Nominal Variables? Perhaps converting nominal variables to real variables has made us dizzy. What if we try something simpler? Let us use nominal variables exclusively and thus not convert the variables.
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Data are for nonfinancial private companies. Data that include the entire private sector are very similar to those presented here. Prepared by the author with data from the US Bureau of Labor Statistics. Now worker compensation and increased productivity go nearly hand in hand. We have to use dotted lines in the graph to make the difference visible. At the beginning of the 2000s, a slight gap did open, but it has now almost closed. However, nothing has taken place that is even close to deserving the bombastic name “the Great Decoupling.”
Conclusion: The Great Decoupling Is a Tall Tale Economists have been quick to jump to conclusions about data that are clearly incorrect. Worker compensation has barely diverged from productivity increases since 1947.
The most seasoned enemies of capitalism are going to have to search for another narrative since the narrative of the Great Decoupling and the growing power of capital over labor lacks empirical and theoretical support. The promarket narrative in which the decoupling is linked to the abandonment of the gold standard has a better theoretical basis. But while the abandonment perhaps caused distortions in capital markets, it does not appear to have affected the labor market.
Originally published at Universidad Francisco Marroquín's Market Trends.
I could see no reason why I should, at the end of each week, pour the reward of my toil into the purse of my master. When I carried to him my weekly wages, he would, after counting the money, look me in the face with a robber-like fierceness, and ask, “Is this all?” He was satisfied with nothing less than the last cent. He would, however, when I made him six dollars, sometimes gives me six cents, to encourage me. (emphasis added)Frederick Douglass, Narrative of the Life of Frederick Douglass, an American Slave (Boston: Anti-Slavery Office, 1845), 102.
This passage comes from the autobiography of Frederick Douglass. With these words, Douglass is describing the experiences of many slaves who lived in the border states of the antebellum United States. It was common for slaves to be granted the “freedom” to contract out their labor for wages, enjoying the ability to move throughout the town, interact with people voluntarily, and sometimes even live on their own. But they were still owned, and this ownership was demonstrated through the demand for a percentage of their earnings from their master. Economically, these slaves were treated as “capital” earning a rent for their owners.
Douglass’ situation was even more controlled than other slaves in a similar position. Even in the deep south, these kinds of arrangements were not unheard of. A slave in Savannah, Georgia, named Charles Ball, worked as an undertaker. From the perspective of other slaves, Ball enjoyed a great many freedoms. He was able to live apart from his owner, and he even hired other slaves with similar ownership arrangements to help him with his work. Compared with Douglass’ experiences, Charles Ball was allowed to keep a sizeable chunk of his income. His master only required the annual payment of $250 a year, paid through monthly installments.Jeffrey Rogers Hummel, Emancipating Slaves, Enslaving Free Men: A History of the American Civil War (Chicago: Open Court, 1996), 42.
In Mississippi, another slave named Simon Gray became the captain of a flat boat, even employing white workers as part of the crew he managed. He was allowed to own and operate firearms, travel freely throughout the country, and he handled large sums of money for the company that employed him. He was allowed to take vacations in Arkansas, and his salary after the “tax” that he paid his owner afforded him the ability to rent a house for his family.Ibid., 42-43.
Frederick Douglass himself said of this type of slave – the “city slave” – that he was “almost a free citizen” because he “enjoys privileges altogether unknown to the whip-driven slave on the plantation.”Frederick Douglas, My Bondage and My Freedom (Chicago: Johnson, 1970), 115.
Libertarians often compare the government to a slave owner and the taxpayer to a slave. This analogy gets received with hostility, and understandably so. Chattel slavery was brutal and barbaric, and the slaves usually received treatment that people living in Western countries today can hardly imagine. But the question is, from the libertarian perspective, “is the city slave like Charles Ball any less of a slave than the whip-driven slave of the cotton plantation?”The answer, of course, is no.
Charles Ball and Frederick Douglass, with these contract-labor arrangements, enjoyed freedoms and privileges that other slaves at the time could have only dreamed of. But they were still, unequivocally, slaves. Likewise, the citizens of the United States or Britain or any other similar first-world country enjoy living in an area that is demonstrably preferable to places like North Korea or Rwanda. Compared to the poor soul who suffered the hell of the gulag, like Alexander Solzhenitsyn, the average American citizen is quite free (though perhaps not the average American citizen who gets arrested for the heinous crime of peacefully owning an illegal plant, as our modern prison system is not as unlike the Soviet gulag as we would like to believe).
When libertarians compare taxation to slavery, we are constantly reminded of the freedoms that we enjoy in this country. It is pointless to deny that this is the case. But those who object to our analogy about slavery fail to understand the key component of what slavery has always been. Slavery has never been defined by the brutality of the conditions under which a person labored; slavery has only ever been defined by the lack of consent to a labor arrangement.Modern taxation has simply codified the arrangement that separated the plantation slave from the city slave.
The headlines this week were dominated by last weekend's events at Charlottesville. Of course, instead of rejecting the the sort of overly politicized society that makes such escalation inevitable, politicians of both sides tried to seize the moment. As such, we have the returning distraction over the battle over confederate monuments — an issue easily remedied by privatizing them.
Lost in the noise of yet another pseudo event is the true root of political violence: the rejection of genuine liberalism. The growth of government comes at the expense of civility.
For this week's Mises Weekends, we're excited to share the first episode of a new Mises Institute podcast, "Historical Controversies." Hosted by Chris Calton, a Mises Fellow, "Historical Controversies" is a series that applies a Rothbardian revisionist look at important sagas in American history. The first season covers the War on Drugs, highlighting the role of the US government in fanning the flames of America's drug epidemic.
As Murray Rothbard said, "History necessarily means narrative, discussion of real persons as well as their abstract theories, and includes triumphs, tragedies, and conflicts, conflicts which are often moral as well as purely theoretical."
Along these lines, Chris interweaves personal stories alongside facts and anecdotes that you will never find in a government approved curriculum. The result is a show that will both entertain and enlighten. We hope you will enjoy the first episode of "Historical Controversies," and will subscribe for new episodes every week.
And in case you missed them, here are this weeks Mises Wire and FedWatch articles, covering a wide array of topics:
People's QE? It's Venezuela with Tea and Cakes by Daniel LacalleA Take of Two "Deflationary" Booms — The Gilded Age vs. Today by Brendan BrownTaxation, Slavery, and Consent by Chris CaltonDo Seasonal Adjustments Help Identify Business Cycles? by Frank ShostakHow Welfare States Make Us Less Civilized by Per BylundPrivatize the Public Monuments by Ryan McMakenDecentralize the Gun Laws by Ryan McMakenHow Central Banking Increased Inequality by Louis RouanetBefore "Fake News," American Invented "Pseudo Events" by Ryan McMakenKorea and Venezuela: Flip Sides of the Same Coin by Jacob G. HornburgerWhy Cryptocurrencies Will Never Be Safe Havens by Mark SpitznagelA New Murray Rothbard Book by Lew RockwellI Just Got Price-Gouged and I'm Still Smiling by Allan StevoWorld War I and the Triumph of Illiberal Ideology by Matthew McCaffreyWhy Some Pharmaceuticals Are So Expensive by Gilbert BerdineThat Google Diversity Memo by Peter G. KleinThe Wrong Narrative in Charlottesville by Jeff Deist
The ongoing coronavirus pandemic has halted economies across the globe. With various countries on lockdown and companies unable to continue production, an economic downturn is inevitable. In light of this, the government of Denmark has come up with a strategy to avoid recession—paying 75 percent of private employees’ salaries.
As long as companies do not fire people, the government is offering to pay 75 percent of their employees' salaries, up to $3,288 per month per employee. To be eligible for this support, a company has to give notice that it will have to lay off 30 percent of its workers or fire at least fifty people. Beyond this, the government is guaranteeing bank loans to companies and compensating them for fixed expenses. The total cost of this undertaking is DKK 287 billion ($41 billion)—approximately 13 percent of the country’s GDP.
Will It Prevent Recession? There are various proclaimed benefits to this measure, many of which on examination are rather shaky. One alleged benefit of this measure, for instance, is that it will help avoid recession. Jobs will not be lost, people will still be paid, and thus the government will save its citizens from recession.
The problem, however, is that the planned measures do not serve to avoid recession. The wealth of a nation, as Adam Smith pointed out long ago, resides in the goods and services it creates. A halt on production inevitably impacts the goods and services produced, and no amount of circulation of currency can avoid a recession.
But the government is not only subsidizing payments, it is also putting forth the condition that those being paid in this way must not work. The government is, quite literally, paying people to do nothing. And although seeing paychecks come in will keep people happy, the economic repercussions of such policies will have to be borne eventually.
Will It Hasten Recovery? Another purported benefit of the measure is that it will help the economy recover faster. Under normal circumstances, companies would have fire workers and then have to go through rounds of hiring and recruitment after the crisis. The costs and time involved in hiring would delay the recovery of the economy.
Yet if the government can recognize the time and monetary costs of recruitment, certainly companies can do so as well. It would make sense, then, for companies to make agreements with their employees to rehire them after the crisis, saving them recruitment costs. With the profit incentive driving them, companies are the entities most likely to do everything possible to minimize resource waste, be it in terms of idle time or money.
Furthermore, the money handed out today is based on the products of tomorrow. Since people will be paid without having produced, the value of currency in circulation will exceed the value of goods available. Inflation, then, is inevitable. Not only will the measures inflate the current prices of goods, but they will also eat up the hard-earned savings of people.
What Does This Mean Politically? The government’s rationale for the spending is that things will be worse if they don't act, and this puts them in a very defensible position. Irrespective of how much damage they cause the economy through their measures, they can always claim that it would have been worse if they hadn’t done what they did.
Moreover, the measures received bipartisan, almost unanimous, support, from the far left to the far right. Unions and employers’ associations are in support of it as well. With such consensus, even if the policies fail no one is likely to highlight the issue. The public itself is convinced that it is the right thing to do. Will economic disaster convince them otherwise, and shift them away from Keynesian policies and big government bailouts? Only time will tell.
American journalists seem mired in fantasy worlds, at least where it comes to economic analysis, and perhaps we see no greater show of ignorance than in the discussion of the presence of businesses in the poorest areas of inner cities. Time and again, pundits make the specious claim that people in cities are poor because of the presence of small businesses, such as groceries owned by Korean immigrants .
Today, the targets are the Dollar General and Dollar Tree store, which offer inexpensive goods, along with a wide assortment of canned and dried foods, along with milk, meat, eggs, and frozen foods. Declares Tanvi Misra in Citylab :
It has become an increasingly common story: A dollar store opens up in an economically depressed area with scarce healthy and affordable food options, sometimes with the help of local tax incentives. It advertises hard-to-beat low prices but it offers little in terms of fresh produce and nutritious items—further trapping residents in a cycle of poverty and ill-health.
Misra quotes the Institute for Local Self Reliance: “While dollar stores sometimes fill a need in cash-strapped communities, growing evidence suggests these stores are not merely a byproduct of economic distress; they’re a cause of it.”
This is an interesting and extraordinary claim: the presence of retail stores that make goods available to people who otherwise would have few or no shopping choices at all is the cause of the poverty that grips the regions where these people live. Furthermore, as more of these stores are built and located in the inner cities, the people living there become poorer as a result of the very presence of these businesses.
Misra then tries to clarify her claims:
Dollar stores have succeeded in part by capitalizing on a series of powerful economic and social forces—white flight, the recent recession, the so-called “retail apocalypse”—all of which have opened up gaping holes in food access. But while dollar stores might not be causing these inequalities per se, they appear to be perpetuating them. The savings they claim to offer shoppers in the communities they move to makes them, in some ways, a little poorer.
How does this phenomenon – that Dollar Stores perpetuate and further conditions of poverty – occur? How does making goods available at affordable prices that would not be possible in the absence of such businesses perpetuate poverty? The pundits reply in two words: food deserts.
According to the U.S. Department of Agriculture, a food desert is a part
of the country vapid of fresh fruit, vegetables, and other healthful whole foods, usually found in impoverished areas. This is largely due to a lack of grocery stores, farmers’ markets, and healthy food providers.
Dollar stores, say the critics, sell mostly processed of canned foods and do not have sections providing fresh foods and vegetables. Therefore, according to the “logic” of the left, because a certain class of foods is not sold at these kinds of stores, therefore they are preventing the sale of such food. Leftist journalists and other critics of private enterprise simply claim that because there are Dollar stores in the inner cities and because these stores don’t sell fresh fruit and vegetables, that therefore private enterprise is the cause for creation of so-called food deserts.
This accusation against businesses, however, does not fly with the facts. In recent decades, Korean immigrants have opened many small groceries in cities like Los Angeles and New York City – and often are met with hostility, violence, and outright murder. During the 1992 Los Angeles riots, inner-city residents often deliberately targeted Korean-owned businesses and police refused to protect them, leaving the merchants to arm and defend themselves.
Likewise, during the 2015 Baltimore riots, rioters looted and burned many Korean-owned enterprises , claiming that Koreans were “exploiting” customers. In New York, it was not uncommon for groups tied to Al Sharpton to organize boycotts and violent demonstrations against Korean store owners. The Koreans were people who risked their own resources to bring fresh fruits and vegetables to neighborhoods where such enterprises had not previously existed, but instead faced violence, boycotts, and outright racist rhetoric against their Asian ethnicity. They did so in an attempt to make a living, not out of benevolence, but their risk-taking nonetheless provided opportunities for inner city residents that they would not have had otherwise.
As for food choices, the claim that fresh food (or maybe semi-fresh, given the distances these foods are hauled, especially in winter) food is more nutritious than frozen or canned foods is overblown. The January 27, 2014, edition of the Journal of Lifestyle Medicine said that “fruits and vegetables packaged as frozen or canned are cost-effective and nutritious options for meeting daily vegetable and fruit recommendations in the context of a healthy diet.” In other words, one can both eat healthy and shop at the Dollar Store, leftist accusations to the contrary.
While much of the rhetoric against Korean and other Asian merchants in the inner cities often is hateful, at least no one has carried out “studies” that accuse these merchants of causing poverty where it had not existed before. As one reads Misra’s article and the quotes from the “experts,” one finds a series of contradictory statements and a lack of understanding of basic economic concepts. For example, she writes:
Today, dollar stores are thriving both in the poorest of small rural towns , where environmental changes or globalization have wiped out economic activity, and larger cities like Baltimore, where decades of disinvestment in largely African American communities have left vast tracts barren of retail options. In a recent blog post tracking their rise in low-income parts of Baltimore , planner and architect Klaus Philipsen observes that dollar stores are now “flourishing in many poorer neighborhoods like a parasite.” (Emphasis mine)
She continues:
The problem is not just the stores themselves. According to the ILSR, they tend to create fewer jobs on average than independent groceries—9 versus 14. The low-wage jobs they do create aren’t of great quality . And it’s not entirely clear if their offerings are that much more affordable either. When economists compared the price of goods like flour and raisins of the same weight, they noticed that dollar store products were higher cost than those at the nearby Walmart or Costco.
Lest one be concerned that Dollar Stores ( according to The Guardian ) are “ripping off consumers with higher prices, Misra also claims the firm is undercutting other businesses with low prices:
Then there’s their negative effect on others stores nearby. When a dollar store opened up in Haven, Kansas—subsidized through tax breaks by the local government—sales at the the nearby Foodliner grocery store dropped by 30 percent, The Guardian reported earlier this year. While the ILSR doesn’t have quantitative data supporting this effect on supermarkets in the vicinity, anecdotally, they surmise that “the difference in margins is just enough that the local stores are not able to stay in business when there are so few options and there is an undercutting of prices,” Donahue said.
The comparison with Wal-Mart is rich. No company has been more accused by the left of malfeasance than Wal-Mart. If Wal-Mart charges low prices and changes the local retail landscape, then the company is said to be predatory. But if Wal-Mart or Dollar Stores charge prices that the pundits deem “too high,” then the stores also are engaged in “predatory” behavior. Furthermore, urban activists time and again have sought to keep stores like Wal-Mart from locating in large cities, but when other retailers move into the void, leftist activist condemn those stores, too.
As for jobs, the purpose of retail stores is to provide goods for customers; no one has touted them as an employment program. However, no matter what leftists might claim , jobs are not the “cause” of poverty. That assumes that people are better off with no income (and no employment) than they are earning money. It is true that retail jobs do not pay very well – something to be expected – but to claim that people are better off having no job, no income, and no available food to purchase than having the presence of a Dollar Store in a city is ludicrous on its face.
So, the American left gives us another set of ridiculous propositions. They demand high-paying jobs but no employers; they demand an abundance of food and other goods, but also demand that no place to sell these items be permitted to be located anywhere.
Dollar Stores are not boutiques, but neither are they the poverty-causing, starvation-producing hellholes that the critics claim them to be. In many urban communities, they are places where poor people can purchase necessities and decent food and snacks. In rural areas and small towns, they mean people don’t have to drive long distances to buy what they need. To put it another way, they serve their customer base well, but it is not a customer base of elite journalists and politicians.
When a woman in 2002 wrote a New York Times Magazine article on Americans adopting Ethiopian children, she mentioned my family, which has two Ethiopian boys. Just before the story was to be printed, someone from the newspaper called me, a “fact checker” who asked several questions trying to ensure that the story would be accurate and that no wrong information would leak into the account.
Whatever commitment the NYT has had toward accuracy and truth, however, has disappeared into the maw of modern identity politics. From Duke Lacrosse to promoting Nancy MacLean’s false allegations about the Nobel-winning economist James Buchanan, the newspaper has taken the view that all truth must fit within a leftist political narrative, and if the facts don’t match the narrative, the paper doubles down in what Murray N. Rothbard once called the progressives’ “war with nature.”
In the opening sentence of his 1871 path-breaking Principles of Economics Carl Menger writes: “All things are subject to the law of cause and effect. This great principle knows no exception, and we would search in vain in the realm of experience for an example to the contrary.” With its highly-publicized and controversial Project 1619, the New York Times has violated Menger’s rule by turning cause-and-effect upside down and in the process, the paper dishonestly rewrites history.
I have no problem with taking a hard look at the history and long-lasting effects that black chattel slavery has had upon the United States. If we agree that slavery brought a host of social ills, then the year 1619 is significant to U.S. History, as it was when the first Africans (who were indentured servants) were brought to Jamestown in Virginia. One need not exaggerate to say that the slave system which developed here was hellish, and there is no sanitizing or justifying it. However, the NYT in its Project 1619 series has done much more than simply exaggerate slavery’s effects on the country; instead, the paper has made outlandish claims that easily are shown to be untrue – and when someone points out a falsehood, the paper’s allies Tweet out a storm of abuse aimed at the truth-telling “heretic.”
Perhaps the most bizarre claims are made by Princeton University sociologist Matthew Desmond, who declared that slavery was the bedrock of capitalism, and that nearly every modern business practice, including double-entry bookkeeping, is the product of American black chattel slavery. Writes Desmond:
Slavery was undeniably a font of phenomenal wealth. By the eve of the Civil War, the Mississippi Valley was home to more millionaires per capita than anywhere else in the United States. Cotton grown and picked by enslaved workers was the nation’s most valuable export. The combined value of enslaved people exceeded that of all the railroads and factories in the nation. New Orleans boasted a denser concentration of banking capital than New York City. What made the cotton economy boom in the United States, and not in all the other far-flung parts of the world with climates and soil suitable to the crop, was our nation’s unflinching willingness to use violence on nonwhite people and to exert its will on seemingly endless supplies of land and labor. Given the choice between modernity and barbarism, prosperity and poverty, lawfulness and cruelty, democracy and totalitarianism, America chose all of the above. (Emphasis mine)
While “woke” progressives would not think Desmond’s statement to be even controversial, it is filled with untruths and thoroughly violates Menger’s dictum on cause-and-effect. The first part of the paragraph is true, in that cotton was the single most valuable export from the United States. The greatest amount of tariff taxes collected for the U.S. Treasury came from southern ports, as cotton exports paid for importation of European and British goods. Furthermore, cotton helped produce wealthy plantation owners, and most of those men owned slaves.
The following sentence, however, is troublesome on many fronts: “What made the cotton economy boom in the United States, and not in all the other far-flung parts of the world with climates and soil suitable to the crop, was our nation’s unflinching willingness to use violence on nonwhite people and to exert its will on seemingly endless supplies of land and labor.”
This statement is typical of modern historians, and especially those that identify with the field called the New History of Capitalism , which claims that capitalism as it developed in the United States owed its success almost solely to slavery and brutality. This is a huge departure from how historians have examined the rise and growth of capitalism, as few of them have seen slavery on its own as the primary source of value in the U.S. economy. Writes Robert Murphy : “Slavery, like war, is a destructive institution that reduces the welfare of most people in society, though a few beneficiaries can profit from the insidious system and thus have an incentive to sing its blessings.”
In examining Desmond’s claim, he assumes two erroneous things. First, he insinuates that slave labor was more valuable than free labor, a contention that effectively is challenged by economists such as Murphy and Vincent Geloso . His second contention is even more dubious. Let me explain.
Desmond assumes that Americans succeeded economically because they were willing to employ higher levels of violence than anyone else. Yet, the American South was not the only place in the world where people grew cotton. Both India and Egypt were major producers of cotton, and one doubts that British overseers were any more benevolent to Indian and Egyptian field workers than their American counterparts. If violence is the key to creating wealth, as Desmond insinuates, then the communist nations would have created fabulous amounts of wealth, given that the regimes running those countries controlled their labor forces even more ruthlessly than did American slave owners control their own. Yet, the common denominator of communist countries is poverty – and lots of it.
Another Desmond claim also is dubious, this one speaking of “seemingly endless supplies of land and labor.” While it is true that the USA had vast tracts of land, especially in the West, areas suitable to growing cotton were limited and improvement in crop yields did not come from planters simply moving west, but rather they improved their growing methods.
Agricultural labor in the United States in the antebellum era was quite scarce , and one of the justifications for slavery that the planters used was that free labor was too scarce to be dependable, so slavery provided economic stability. Far from being “endless” in supply, available labor was quite scarce, and certainly scarce enough to help provide justification for slave owners that were criticized for promoting the “peculiar institution.”
While slave owners did value slave labor, nonetheless it is improper, as Desmond has done, to claim that slavery was the source of value. As Carl Menger noted in Principles, factors of production – including labor – gain their value by contributing to the creation of the final product, the consumption good. Cotton was the product of value, and slave labor became valuable to plantation owners because it was useful in producing that good, not because slavery was intrinsically valuable.
To better clarify this point, read the following from Greg Timmons :
With cash crops of tobacco, cotton and sugar cane, America’s southern states became the economic engine of the burgeoning nation. Their fuel of choice? Human slavery . If the Confederacy had been a separate nation, it would have ranked as the fourth richest in the world at the start of the Civil War. The slave economy had been very good to American prosperity.
If Timmons’ contention was true – that slavery fueled agricultural prosperity – then one would have to conclude that American farmers and business owners that failed to use slave labor were placing themselves at a disadvantage, which would have made slavery more attractive relative to free labor. Furthermore, as Robert Murphy has noted , if slavery were truly the “fuel” of southern agricultural prosperity, then one would expect the value of cotton to have fallen after the Civil War ended and slavery was abolished.
However, Murphy points out that the cotton economy improved in the latter part of the 19th Century relative to its performance in antebellum years, which would support the thesis that free labor was more competitive than slave labor, even in a region where slavery had dominated the workforce for more than a century.
It is one thing to say that slavery was pervasive in American life before the Civil War. Furthermore, slave labor was vital to the success of the southern plantation – but it was not exceptional, as the New History adherent claim. To declare, as Desmond does , that slavery was super-productive and that the source of the productivity came from beatings, whippings, killings, and other atrocities is so ludicrous on its face as to make one wonder why anyone takes the New History School seriously.
Had slavery not existed in the USA, one can be sure that the nation’s economic and political development would have been different than what actually happened. It is doubtful that the plantation system as we know it would have developed, especially in the absence of available labor, given the farm economy at that time was extremely labor intensive and the fact that the labor situation in Colonial America differed greatly from what existed in Great Britain and Europe. Given that Social and cultural attitudes toward slavery differed greatly in the 1600s and early 1700s than they do now, perhaps it is not surprising that landowners, when faced with labor shortages, turned to the slave market. While it is difficult for modern-day Americans to comprehend those attitudes today, in the 17 th and 18th centuries slavery was the acceptable norm in most countries of the world.
These facts do not excuse the cruelties of the slave economy, but they do help us better understand the economic conditions and the social mindset that brought it about. It is one thing to condemn slavery, and any freedom-loving person should do so; however, it is quite another to attribute things to slavery and the American slave economy that are untrue. Unfortunately, that is what the country’s Newspaper of Record has done.
John Cochrane has an entertaining and informative blog called “The Grumpy Economist,” offering insights centered in the Chicago School approach that nonetheless will resonate with the Austrian reader. However, in a recent post Cochrane erroneously claimed that people living in high-rent areas of California were effectively using a different currency than other Americans. This type of loose talk is incorrect, as Mises explained in his classic 1912 work, The Theory of Money and Credit. In this article I’ll pinpoint the precise error involved, to shed light on how prices and wages are set in the market economy.
Cochrane on Price Indices The main subject of Cochrane’s post concerns the estimation of “price indices” and the measured rate of (consumer price) inflation. But in the present article I want to focus on this portion of Cochrane’s commentary:
The next issue…that I think is much under-studied: the huge local variation in prices, and, via huge variation in what we consume, the inflation experienced by people in different parts of the country. Living in California and especially the Bay Area is like living in a different country with a different currency. Even gas costs twice what it does in the rest of the country. A lot of what appears to be income inequality is just different prices, and especially land prices. (Much of the productivity of tech workers went in to the pockets of existing land owners.) If you get paid 100 yen in Japan, you're not 100 times wealthier than someone who gets paid 1 dollar in the US. Being paid $100,000 per year in San Francisco is something like that—and being paid $20 per hour in much of the US is nowhere near the disaster [that] being paid that much in San Francisco would be.
Although Cochrane is putting his finger on an important point regarding estimates of income inequality, his motivation is totally wrong. Yes, if Smith makes $100,000 working in San Francisco while Jones makes $50,000 working in Cleveland, it would be wrong to conclude that Smith necessarily is enjoying “twice the standard of living” as Jones.
However, Cochrane is wrong to argue that this phenomenon is akin to different currencies being employed in the two regions. For one thing, we know that it’s U.S. dollars being used in both places. (Duh.) But more important, the fact that most prices are higher in San Francisco doesn’t mean that dollars-in-San-Fran are weaker than dollars-in-Cleveland, the way we can say that the yen is weaker than the dollar.
Mises on the “Cost of Living” and the Purchasing Power of Money Mises addressed the fallacy underlying Cochrane’s argument, but also the germ of truth in Cochrane’s position, in his classic 1912 work, The Theory of Money and Credit:
[T]hat the cost of living is different in different localities only means that the same individual cannot secure the same degree of satisfaction from the same stock of goods in different places….[T]he belief in local differences in the cost of living is…supported by reference to local differences in the purchasing power of money….It is no more appropriate to speak of a difference between the purchasing power of money in Germany and in Austria than it would be justifiable to conclude from differences between the prices charged by hotels on the peaks and in the valleys of the Alps that the objective exchange-value of money is different in the two situations and to formulate some such proposition as that the purchasing power of money varies inversely with the height above sea-level. The purchasing power of money is the same everywhere; only the commodities offered are not the same. They differ in a quality that is economically significant—the position in space of the place at which they are ready for consumption.
But although the exchange-ratios between money and economic goods of completely similar constitution in all parts of a unitary market area in which the same sort of money is employed are at any time equal to one another, and all apparent exceptions can be traced back to differences in the spatial quality of the commodities, it is nevertheless true that price-differentials evoked by the difference in position (and hence in economic quality) of the commodities may under certain circumstances constitute a subjective justification of the assertion that there are differences in the cost of living. [Mises, The Theory of Money and Credit, p. 176, emphasis in original.]
To drive home the point, Mises then applies these principles to the case of Karlsbad, which (in his day) was an attractive tourist destination because of its spa:
He who voluntarily visits Karlsbad on account of his health would be wrong in deducing from the higher price of houses and food there that it is impossible to get as much enjoyment from a given sum of money in Karlsbad as elsewhere and that consequently living is dearer there. This conclusion does not allow for the difference in quality of the commodities whose prices are being compared. It is just because of this difference in quality, just because it has a certain value for him, that the visitor comes to Karlsbad. If he has to pay more in Karlsbad for the same quantity of satisfactions, this is due to the fact that in paying for them he is also paying the price of being able to enjoy them in the immediate neighborhood of the medicinal springs. The case is different for the businessman and laborer and official who are merely tied to Karlsbad by their occupations. The propinquity of the waters has no significance for the satisfaction of their wants, and so their having to pay extra on account of it for every good and service that they buy will, since they obtain no additional satisfaction from it, appear to them as a reduction of the possibilities of the enjoyment that they might otherwise have. If they compare their standard of living with that which they could achieve with the same expenditure in a neighboring town, they will arrive at the conclusion that living is really dearer at the spa than elsewhere. They will then only transfer their activity to the dearer spa if they believe that they will be able to secure there a sufficiently higher money-income to enable them to achieve the same standard of living as elsewhere. But in comparing the standards of satisfaction attainable they will leave out of account the advantage of being able to satisfy their wants in the spa itself because this circumstance has no value in their eyes. Every kind of wage will therefore, under the assumption of complete mobility, be higher in the spa than in other, cheaper, places. [Mises, The Theory of Money and Credit, pp. 176-177]
As Mises makes clear, when the “cost of living” is relatively high in a certain area, it’s because there is something that attracts people. The higher density of the population drives up the price of land, which means rental prices are higher. This is the market economy’s way of rationing the scarce good “proximity to the region that many people like” and allocating it to those most willing to pay for it.
Cochrane’s Mistake: Extending the Analysis Thus far, it might seem as if I’m quibbling over semantics, because Mises seems to agree with the spirit of Cochrane’s observations. However, the important difference—and the basis for my article—is that Cochrane thought the higher “cost of living” was akin to people in San Francisco using a different currency. And as Mises stresses repeatedly in the passages I quoted above, that is simply not correct. Not only do people in San Fran and Cleveland both use dollars, but the dollar has the same purchasing power in both places, as well.
If it didn’t—in other words, if it really were the case that you could buy more of “the same goods” with $100 in Cleveland than you could in San Francisco—then why wouldn’t merchants buy goods for $100 in Cleveland and sell them for (say) $140 in San Francisco, netting a profit after the costs of transportation were taken into account?
Once we think through the logic of arbitrage, we see that Cochrane’s throwaway remark about people in the Bay Area using a “different currency” is untenable. People in the Bay Area use the same dollars as everywhere else in America. The reason prices are higher in the Bay Area has to do with taxes and higher real estate prices.
For example, according to AAA, gas prices in California as of this writing average $3.61 per gallon, while in neighboring Nevada they’re only $3.12. This seems like an odd discrepancy; why don’t some enterprising fellows load up tanker trucks in Reno, and drive the 200+ miles to San Francisco, to make about 50 cents per gallon delivered (before subtracting their costs of transport)?
The main reasons are that California has special environmental regulations on the gasoline that can be sold in the state, even requiring different summer/winter blends. This means refiners have to create gasoline specifically for the California market. Further, California enacts higher taxes on gasoline than its neighbors—in fact, the highest in the country—as this chart from the American Petroleum Institute (API) reveals:
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As the chart indicates, the state and local gas tax average in California is some 27 cents higher per gallon than in Nevada—and a whopping 42 cents per gallon higher than in Arizona.
Obviously John Cochrane, a professional economist who taught at (the Booth School of Business at) Chicago University, understands the role of taxes in affecting retail prices. But nonetheless, it is a category mistake to say this disparity in prices is comparable to the use of different currencies. Cigarettes cost way more in New York City because of the whopping taxes levied on them; it’s not because New Yorkers use a different type of money.
Why Do People Pay More to Live in Big Cities? Another way to see the flaw in Cochrane’s analogy is to ask: How are these discrepancies supported? For example, if Firm A in Cleveland offers pay of $50,000 per year, while Firm B in Cleveland offers pay of 5 million pennies per year, then that’s actually the same salary. The monetary unit in the first firm is dollars, while in the second it’s pennies, and the exchange rate between the two is one dollar trades for 100 pennies.
But that’s clearly not what’s going on, when Firm A in Cleveland pays $50,000 per year for “the same job” that pays $100,000 in San Francisco. If workers in either city saved up $10,000 from their respective paychecks and wired them to their mothers back home (in Florida, say), then they would be the same money. It’s obviously not true that “dollars earned in San Francisco” are a different currency from “dollars earned in Cleveland,” the way it really would be a different unit if a firm paid its workers in pennies (or Japanese yen).
This raises the question, then, of why do workers move to a big city where the rent is so high? As I’ve exhaustively argued above, this isn’t a mere matter of units. Dollars are the same in San Francisco, but most of the prices are higher. Why do people put up with this?
The obvious answer is, “Because wages and salaries tend to be higher.” But why don’t we see, for example, millions of people living in Antarctica? It would be really expensive to build adequate shelter and food delivery in such an environment, and so in order to get people to move there, the wages of janitors in Antarctica would have to be astronomical. Yet we don’t see this; the market outcome is that barely anybody lives in Antarctica.
The brief explanation is that the productivity of many types of labor is much higher in urban areas than elsewhere. Historically the development of the big cities in the United States was tied to water transport: New York, Los Angeles, and Houston are still major port cities, while Chicago’s access to the Great Lakes and key rivers played an important role in its growth.
So it wasn’t a coincidence that America’s largest cities developed where they did. However, once people start living in close proximity because of some external factor (such as access to the water), there is a separate effect: Their productivity is amplified in other areas too, simply because of their proximity. The “economic approach to cities” is an entire subfield, so I won’t dwell on it here. Suffice it to say, people don’t spread out uniformly across the land, the way electrons repel each other on the surface of an object to distribute the electric charge uniformly.
Rather, more than half of the people in the world currently live in urban areas or cities, with projections that that figure will rise to two-thirds by 2050. There must be some reason for this attraction. On the consumer side, it might be the ability to eat at the finest restaurants and go to a Broadway show (if we’re talking about Manhattan). On the producer side, it might be because cities offer the highest salaries, and are worth moving to, despite the higher price for an apartment of a certain size.
Yet contrary to Cochrane, these high wages aren’t due to a difference in currency; they are supported by the fact that the productivity of workers is genuinely higher. The worker who is paid $100,000 in San Francisco is producing twice as much for his employer as the worker who is paid $50,000 in Cleveland. This isn’t because the units are different, it’s because the first worker is genuinely more productive.
Conclusion John Cochrane’s remark that living in the Bay Area is “like living in a different country with a different currency” is innocuous enough for everyday conversation, and it also does bring nuance to the debates over income inequality in the United States. However, strictly speaking, his claim is economically nonsense. Moreover, when we think through exactly what’s wrong with it, we end up appreciating the intricacies of the market economy and the role prices serve in allocating resources, including labor.
January's report on fertility from the CDC set off a new wave of speculation in the media about the alleged "fertility crisis."
We continue to see headlines like Fortune magazine's article "Americans Aren’t Making Enough Babies, Says CDC " and we hear from experts in this Marketplace interview that replacement-level fertility, "is needed to sustain high living standards and a high quality of life."
This latter sentiment takes us to the heart of the matter: when we hear about the fertility crisis, it is usually packaged as an economic crisis. That is, we're told that standards of living will collapse if people don't start to have more babies.
This argument, of course, should be noted as being distinct from other arguments— namely sociological, cultural, political, and religious arguments — in favor of higher fertility. Some of those are compelling.
I remain unconvinced, however, that a stagnant or declining population necessarily presents an economic problem or a threat to the standard of living. The problems we were likely to encounter result from government programs and government spending — not from demography or markets themselves.
Fewer People Can Mean More Resources per Person As Peter St. Onge has pointed out, zombie movies have dramatized the relative plenty that could result from a cataclysm that destroys population without destroying capital. We can, of course, also point to a real-life version of this in which a population decline led to a higher standard of living: the Black Death.
When the Black Death finally receded — having peaked around 1350 — the survivors found themselves in a world with a reduced workforce, but with most capital in tact. Thus, as historian Christopher Dyer notes, "Unskilled workers' wages rose more rapidly than those of the skilled after 1349, a sure indication of a labour shortage, and confirming Thorold Rogers's aphorism that the period was the 'golden age of the labourer.'"
Historians Tine De Moor and Jan Luiten Van Zanden also note broad social implications of this shift. In the wake of the plague, the "booming labour market" meant "In the century and a half following the Black Death, young women and men were able to free themselves from parental influence through their high real earnings." Family formation, marriage age, and the extended family all changed as a result of a declining population.
In societal terms, this wasn't without its down side. Social and political upheaval followed, and that often ends poorly. But when we're looking at strictly economic factors like labor and income, there's little to suggest that the steep declines in population experienced during the plague were an economic problem for those who survived to take advantage of the wealth left behind by the dead.
Now, one could point out that this is not relevant to the current situation since populations began to grow again once the plague was over.
That's true, although there's little to "prove" that population growth is the essential factor in economic growth. The empirical research on the relationship between population growth and economic growth in other contexts hardly produces a consensus. Conclusions are highly varied depending on the population being studied, and the methods used. Historians continue to debate the matter because just establishing correlations simply isn't enough.
Economic Growth Comes from Productivity Growth Good economic theory does tell us, however, that economic growth is not primarily a function of the number of people. It's mostly a function of capital accumulation and worker productivity. What matters is not how many people there are, but how productive each person is, thanks to investment in capital that makes each worker more productive. More productivity results from more access to capital per person — or per worker. Higher worker productivity, of course, can then drive more population growth as standards of living increase. But there's little reason to believe things work in the opposite direction. If that were the case, India and China would be far wealthier than they are.
On the other hand, it's certainly possible to imagine some scenarios in which standards of living — in the aggregate — significantly decline as populations decline. These would be situations in which the number of elderly retired people incapable of working outnumber productive younger workers. Older non-workers might consume capital faster than new younger workers can produce it. But, again, even this scenario depends heavily on how much worker productivity grows.
A Government-Created Crisis The problem of retirees, however, becomes an enormous political problem once governments enter the picture.
So far, we've been considering the effects of population decline in a relatively unhampered marketplace. But what happens if there's a government which mandates large transfers of wealth and income from current workers to retired workers?
Then, we see that population decline becomes a big problem for policymakers, and those who depend on government programs. As Nathan Lewis at Forbes writes:
The main problems are, in my view, related to existing government policies and programs, which are based, overtly or implicitly, on expanding population. Basically, they are Ponzi schemes, which need to grow or die. This includes public pensions (“Social Security” in the U.S.), existing healthcare programs, and patterns of government debt and deficits. Many of these were conceived in the late 19th century, and expanded during the mid-20th century. They may have been appropriate for 1960 or 1970, but are not appropriate today.
For example, a pattern of continuous government deficits and growing total debt can be sustained for some time if nominal GDP is also growing quickly. The “debt dynamics” allow debt/GDP ratios to maintain some semblance of sustainability, at least until a politician’s term of office is ended. Alas, this continuous-growth Ponzi doesn’t work well in an environment of population shrinkage.
In a more laissez-faire economic environment, workers would work longer — especially now that frailty and disability arrive for workers much later than they did when Social Security was invented in the 1930s. Also, in a world where retirees could not reliably fleece younger workers, those who fully retired would have to substantially cut their spending. This is just the natural progression of working life. In a functioning marketplace it's unrealistic to expect to keep spending at the same rates that one did when one earned a full time income — unless, of course, one has substantial savings.
But for most people, they'll have to cut back as they retire. In a world with a large number of politically active pensioners, though, retirees can continue to maintain a high level of consumption if they can use the power of the state to subsidize their standard of living.
This is where the problem gets big.
In a world of declining population — if older populations are more numerous than younger ones — the burden of maintaining the retirees' standard of living would continually increase on each individual worker. The only way to keep up pension payments at a constant or growing level will be to increase the taxes levied on current workers. This could have disastrous results by gradually siphoning off more and more wealth from current workers to maintain the standard of living of retirees. The long term effects would be to reduce the ability of younger workers to save and invest in capital. In other words, the economy's resources would be shifted from production (by younger workers) to consumption (by retirees). This would reduce capital, saving, and, ultimately worker productivity. (Unrelenting consumption by retirees would also keep consumer prices high for current workers.)
The results then would be a true crisis.
So, we find that a declining population is not necessarily an economic problem — but it is a big political problem. The crisis we're facing now is not a result of some built-in demographic phenomenon. It is, rather, a problem with government pensions, entitlements, and transfers from productive workers to non-productive retirees.
The recent incident at a Philadelphia Starbucks in which police arrested two black men who were waiting for a friend to join them has stirred a lot of controversy and brought bad publicity to the coffee chain. Facing demonstrations accusing the company of racism, the Starbucks management even closed some of its stores for one day in May so that employees can undergo training to deal with racial biases.
Given the company’s history of supporting progressive causes and politicians , and its outright forays into the nether regions of political correctness , one would think that the progressive establishment would cut the company a break, especially given that the manager of the Philadelphia store is known herself as being a “ social justice warrior .” Such things don’t matter to progressives, however, as one misstep from orthodoxy can trigger a cascade of Twitter mobs, “doxing” (activists quickly put the manager’s personal information online, subjecting her to death threats and forms of public shaming, not to mention her being removed from her job), and outright threats.
That American firms find themselves immersed in the intense political struggles no longer seems surprising. Google fired engineer James Darmore after he wrote a memo that questioned the company’s “diversity” policies, and Mozilla forced out CEO Brendan Eich because he had contributed money to an organization that opposed legalization of gay marriage. The New Yorker recently attacked the fast-food restaurant chain Chick-fil-A for even existing in New York City and for openly having Christian principles in the company’s organizational structure. Mayor Bill de Blasio demanded a boycott of the restaurant when it opened in New York; New Yorkers apparently failed to heed his demands and are buying a lot of chicken sandwiches, instead.
In the movie, “ Dr. Zhivago,” the revolutionary Strelnikov tells Zhivago: “The personal life is dead in Russia; history has killed it.” The only thing left, of course, is the political life. I saw a recent flyer publicizing a women’s study program at a university declare: “Feminism is about connecting the personal with the political,” and wondered if the writer someday would be as enthusiastic about killing political opponents as was the fictional Strelnikov.
These are the undeniable recent political developments in the USA, but what do they mean for a market economy or, to be more specific, an economy that is based upon relatively free prices, property rights, and entrepreneurship? The answers to such questions is simple: As long as promoters of political correctness seek to use the state to coerce others to accept PC viewpoints, the growth of PC in the workplace will be economically harmful and impose unnecessary costs upon producers and consumers.
First, and most important, we are not dealing with simple preferences. As pointed out, many people on the left refuse to patronize Chick-fil-A because the company’s leadership does not believe that gay marriage is compatible with Biblical principles. Furthermore, the company has contributed money to organizations that oppose gay marriage, which has enraged certain political factions, and especially some Democratic Party politicians.
The city government of Chicago, for example, in the past refused to permit Chick-fil-A to open a franchise in the Chicago city limits because of the company president’s stated beliefs. (The city has three locations today.) Chicago Mayor Rahm Emmanuel justified the action by claiming that the business did not conform to “our values”:
Chick-fil-A values are not Chicago values. They disrespect our fellow neighbors and residents. This would be a bad investment, since it would be empty.
Chicago Alderman Joe Moreno, who was behind the blocking of Chick-fil-A opening a store in his ward, added:
They (Chick-fil-A) should be in the business of selling chicken, not promoting a political philosophy. If they want to come out with an anti-discrimination policy, put it in their employee handbook, post it in their restaurants…then we can have a discussion.
These are curious remarks, given that Moreno and Emmanuel are demanding not only that Chick-fil-A have a political philosophy, but one that agrees with the worldview of the Chicago politicians and those political groups with which they are aligned. Furthermore, the demands that businesses promote certain political viewpoints – or not be permitted to exist – have far-reaching consequences and have only a social downside.
Second, we are seeing businesses spending millions of dollars for “diversity” programs and “diversity officers, ostensibly to create “a work culture where all employees can be productive, respected, and feel safe in their work environments.” However, as the Damore incident demonstrates, Google was not looking for a more-productive environment but rather an environment of political conformity.
Given that “diversity officers” exist to promote a particular political philosophy, they are more accurately labeled “political officers,” and anyone familiar with the organizational structure of various Red Army factions in the former U.S.S.R. and other communist countries understands the actual role of the political officer. Those officers had one duty, and that was to enforce political conformity and to root out possible dissenters, and it does not stretch credulity to say that the gaggle of diversity officers burrowed into American businesses, colleges and universities do not have similar roles.
For every James Damore, there are many employees at U.S. firms that simply are silent about their political views, religious beliefs, or pro-life views on abortion. It is not worth the risk to them to test the bounds of tolerance in their workplaces.
In that regard, profit-oriented business organizations that hire political officers and demand political conformity in the workplace are mimicking government agencies, and it is here that we turn to Bureaucracy by Ludwig von Mises for guidance. Mises noted that a business cannot be run by bureaucratic management and simultaneously be successful in satisfying consumer demands and being profitable (at least in a market system). He writes:
…the manager is not a business executive but a bureaucrat, that is, an officer bound to abide by various instructions. The criterion of good management is not the approval of the customers resulting in an excess of revenue over costs but the strict obedience to a set of bureaucratic rules. The supreme rule of management is subservience to such rules.
Mises continues:
Every kind of government meddling with the business of private enterprise results in the same disastrous consequences. It paralyzes initiative and breeds bureaucratism.
While many of the firms in question have claimed that a “diverse” workforce also is more effective than one not diverse, one wonders why the “diversity” numbers have not reflected what the companies claim to be obvious. The people who own and run Google seem to seek factors of production that will satisfy their customers and provide profitability to the company. One cannot imagine the CEO claiming that it was hiring an officer to oversee diversity of hardware. Indeed, if hiring managers have been bringing in its “undiverse” workers simply to satisfy their own desires of making sure their hires “look like them,” then they have done their employer a disservice.
To put it another way, when these firms hire diversity officers, they are not doing so because they believe that since their inception they have been employing inferior workers, but rather because they wish to impose political directives upon their employees, directives that are in line with their own current political philosophy. However, once these companies go this route – basing production decisions upon political viewpoints – they chose to apply the bureaucratic model rather than one that is entrepreneurial.
At the present time, firms like Apple or Google are so successful and so productive that one cannot imagine their demise, and especially their demise as being self-imposed. Less than two generations ago, people were saying the same thing about General Motors and IBM. General Motors collapsed because it could not sustain its private employee welfare state model and IBM bet the house on mainframe computers. The larger point here is once companies abandon or limit their entrepreneurial focus and seek political or some other kind of conformity, they succumb to the sclerosis of bureaucracy.
Likewise, if firms like Chick-fil-A are denied the right even to exist because an executive with the firm disagrees with politicians about the Sexual Revolution, or if people are denied opportunities to work because their political views do not conform to the views of people in power, the result is lost economic opportunities, or what economists might call deadweight losses. These are real costs borne by real people, costs for which there is no economic return.
In the former U.S.S.R. and other communist countries, one’s political status has been one of the main determiners of someone’s employment and standard of living. One cannot argue that such a state of affairs made life better for consumers and workers in these states and one certainly cannot argue that imposition of such political directives will do anything but harm our own economy.
Dr. Carmen Elena Dorobăț is a Fellow of the Mises Institute and Senior Lecturer (Associate Professor) at Manchester Metropolitan Business School in the United Kingdom. She has a PhD in economics from the University of Angers, and is the recipient of the 2015 O.P. Alford III Prize in Political Economy and the 2017 Gary G. Schlarbaum Prize for Excellence in Research and Teaching. Her research interests include international trade, monetary theory and policy, and the history of economic thought.
While the Federal Reserve is desperate to depict an optimistic vision for the global economy, their fellow central bankers aren't buying it. Earlier this week Mark Carney of the Bank of England shutdown talk of the BOE possibly following the Fed's lead in raising interest rates. Meanwhile, as Fed officials are openly worrying about whether technological advances are undermining their misguided war against deflation, the ECB is desperately looking for people to blame if Europeans begin to feel the pain from rising prices.
On Mises Weekends, Jeff is joined by Dr. Ed Stringham, a Mises associated scholar and the author of the book Private Governance. More and more Americans are waking up to the reality that the US criminal justice system is hopelessly broken, riddled with bad incentives and bad actors. In the wake of recent police shootings Jeff and Ed discuss how and why private security firms could create vastly better outcomes for crime victims, society, and even perpetrators. This is a fascinating discussion you won't want to miss.
And in case you missed them, here are this weeks Mises Wire articles, covering a wide array of topics including: shorter work week ahead, the Fed, our politicized legal system, the stalled money supply growth, and let's privatize the New York City subway.
What Derek Carr's Contract Teaches Us about Wall Street and Income Inequality by Tho BishopThe ECB Blames Inflation on Everything but Itself by Louis RouanetRichard Cantillon Is Sleepless in Seattle by Doug FrenchTeaching "Tips": An Economic and Pedagogical Defense of Gratuities by Anthony GillOur Lawless Central Bank by Ryan McMakenFour Reasons Central Banks are Wrong to Fight Deflation by Guido HülsmannThe Tragedy of the Commons in the Courtroom by Chris CaltonDoes the Fed Follow Its Own Rules? by Daniel Fernández MéndezWill Our Grandchildren Work Only Four Hours Per Day? by Ryan McMakenJeff Sessions's Reefer Madness by Mark ThorntonHow to Fight For Peace by Ron PaulMoney Supply Growth Fell to a 104-Month Low in May by Ryan McMakenAfter Brexit: Germany and the EU Will Look to Asia by Alasdair MacleodOil Is Cheap — Why OPEC Can't Do Anything About It by Edgar OrtizPrivatize the New York City Subway System by Robert FellnerHelp Wanted: Lenders with No Experience (or Short Memories) to Make Risky Mortgages by Doug FrenchTrump Turns Back the Clock With Cold War Cuba U-Turn by Ron PaulFed Raises Rates — Will Other Central Banks Follow? by Ryan McMaken
Janet Yellen made headlines this week, assuring the global economy that there's no reason to fear a super bubble, she doesn't expect to see another financial crisis "within our lifetimes." Of course, Ms. Yellen is not the first Federal Reserve chairman to express such confidence about the future — unfortunately, however, such boasts rarely age well. As she and her colleagues continue to ignore the consequences of their own actions, it becomes more important for people to reject policies designed to give them ever more control and demand a return to money beyond the influence of delusional central planners.
Freeing Americans from the control of the Fed was a passion for Dr. Ron Paul while in Congress, and he joins Jeff this week on Mises Weekends. The two talk about his efforts to legalize the use of gold and silver as untaxed currency, and his involvement with sound money initiatives in states like Arizona and Wyoming. Plus he shares some great anecdotes about Reagan's Gold Commission, Alan Greenspan, and Paul Volcker.
And in case you missed them, here are this weeks Mises Wire articles, covering a wide array of topics including: gold standard, interest rates, healthcare, the problems with law schools, public education, and government unhealthcare.
Did Obamacare Really Save Lives? by Robert MurphyWhere Ignorance Is Bliss by David GordonPeace Is Popular by Jeff DeistThe Existence of Evil by Claude Frédéric BastiatGovernment Medicine: Court Declares Child Should Die Rather Than Receive Privately-Funded Health Care by Ryan McMakenNo, Mark Carney, Brexit Didn't Cause Inflation — You Did by George PickeringTrump's Pricey Love Affair With Saudi Arabia by William D. HartungMyths Behind the War on Cash by Ronald-Peter StöferleA Look at Uncertainty in the UK, Post-Election by Daniel LacalleCanadian Interest Rates Set to Rise? by Caleb McMillanIs America Really Coming Apart, As Charles Murray Suggests? by Jeff DeistTime to Cash Out of the Banking System? by Joseph T. SalernoJim Grant Explains the Gold Standard by Ryan McMakenThe Super Bubble Is in Trouble by Thorsten PolleitRepublican Healthcare Plan Fails the "Jimmy Kimmel Test" by Ron PaulThe Money-Velocity Myth by Frank ShostakThe Danger of "Public" Education by Murray RothbardYes, the Fed Really Is Holding Down Interest Rates by Joseph T. SalernoWill the Work Day Shrink to Four Hours? by Randall G. HolcombeThe American Bar Association Stifles Legal Education by Allen Mendenhall
Should we care about inequality? Interventionists and egalitarians of all stripes would answer with a resounding “yes.” They argue that, in the words of former president Obama, inequality is “the defining challenge of our time,” and their criticisms of high and growing inequality such as Occupy Wall Street’s protests against the (symbolic) “1%,” Piketty’s Capital in the Twenty-First Century, or the annual Oxfam report on wealth inequality manage to draw a lot of public attention.
Conversely, free market advocates and proponents of capitalism appear to often categorically reject the notion, as illustrated by Daniel Lacalle’s recent Mises Wire article. Instead of focusing on inequality trends, Lacalle and others argue, we should focus on the achievements of capitalism with regard to the staggering increase in (material) living standards across the globe, and not worry too much that growth has not been evenly distributed. Inequality is seen as a natural outcome of the market process and economic development, provides positive economic incentives, and rewards individuals according to their efforts and services rendered to society at large. Public and political focus on inequality just serves as justification for continued interventionism, which is threatened by steady retreat of absolute poverty across the world. To quote Lacalle: “If the world eradicates poverty, the bureaucrat’s job is gone.”
Inequality, however, is a complex phenomenon, encompassing wealth and income as well as within — and between — country inequality, not all of which move in the same direction (global income inequality, for example, is now falling). More importantly, it is important to analyze what causes inequality. Whether inequality is good, bad, or indifferent is ultimately a moral judgment.Of course, there are also attempts to make value-free arguments for why inequality is “bad,” such as the proposition that certain levels of inequality harm “growth.” These, however, seem reminiscent of the “neoliberal” pattern where policy recommendations are declared to be “objective” on the grounds that growth or “efficiency” are somehow “objectively” desirable. It is here that the free-market position would benefit from a more nuanced analysis.
Despite different judgments concerning inequality, interventionists and free-market advocates seem to agree that, for the most part, inequality is a natural outcome of the market process or “capitalist development.” Throughout history and across the globe, however, the causes of inequality have been multi-faceted and lie not only in economic processes, but stem also from the institutional realm. It is the latter — inequality caused by (state) intervention — which the supporters of the free market might also find objectionable and in opposition to their ideals.
RELATED: "How Money Production Can Worsen Income Inequality" by Jörg Guido Hülsmann
One example, which should speak to Austrian economists and libertarians and addresses one of the most potent symbols of contemporary social movements, “the fight against the 1%,” is that of modern central banking and monetary policy. As Louis Rouanet and others argue, central bank policy, notably the creation of asset bubbles and Cantillon effects which redistribute income from the bottom to the top via inflation, has played an important part in increasing wealth and income inequality in the US over the last decades. This development has continued unabated in the aftermath of the financial crisis of 2007/08 and the subsequent “unconventional monetary policy,” and does not constitute a “normal” outcome of the market process, but a significant intervention in it (with policies such as bail-outs effectively eliminating one important half of the market’s profit and loss mechanism). It has also not resulted in unevenly distributed “improvement for all,” but in great material improvements for some and stagnation for many others.
Free-market advocates are, of course, often at the forefront of criticizing such policies and interventions. However, it would appear that linking such criticism explicitly to the inequality debate, acknowledging the concerns over rising inequality, and differentiating between “fair” and “unfair” inequality depending on its sources is a better strategy for the advocates of free markets than categorically dismissing that inequality is anything to be concerned with at all.
Anthony Gill (Ph.D. UCLA; B.A. Marquette) is Professor of Political Science at the University of Washington, a Distinguished Research Scholar at Baylor University’s Institute for the Study of Religion, and former research associate at the Religious Freedom Project (Georgetown’s Berkeley Center for Religion, Peace, and World Affairs). He is the author of Rendering Unto Caesar (Chicago) and The Political Origins of Religious Liberty (Cambridge), which won the American Sociological Association’s Section on Religion’s Distinguished Book Award. While still writing on religious liberty, Gill’s current research agenda is shifting to understanding the role of local norms in coordinating human behavior (as opposed to government regulation). Tony is also collaborating on a book with a former student entitled Greekonomics: How Economics Explains Fraternities and Sororities. He teaches courses in political economy, public choice, and religion and politics, and earned the University of Washington’s Distinguished Teaching Award in 1999.
The employment recovery in the United States is as impressive as the collapse due to the lockdowns.
In April I wrote a column stating that “The U.S. Labor Market Can Heal Quickly,” and the improvement has been positive. Very few would have expected the unemployment rate to be at 8.4 percent in August after soaring to almost 15 percent in the middle of the pandemic. This means that the unemployment rate is in August 2020 lower than what analysts projected for the end of 2020. Even the measure of underemployment (U-6) has fallen from 22.8 percent to 14.2 percent.
In August, the number of persons who usually work full time rose by 2.8 million to 122.4 million, or 10 million below the level of August 2019, and the number of persons not in the labor force who currently want a job declined by 747,000 to 7 million, which is still 2 million higher than in February. This means both incredibly positive news and that there is a lot left to do. Few would have expected full-time employment to be that close to last year’s level by now.
Since the reopening, the US has recovered almost 11 million jobs, continuing jobless claims have fallen rapidly, from 25 million to 13.25 million, and full-time employment is rising strongly, while the Atlanta Fed median wage growth tracker remains at 3.9 percent for 2020. It is true that the good August jobs data includes part-time workers hired for census activity, but the truth is that those accounted for less than one out of every six new jobs created.
Even acknowledging that there is a lot of work to do to recover the record levels of employment of February 2020, at this rate the United States would be able to return to all-time high levels of employment by the first quarter of 2021 instead of 2023, as the Federal Reserve estimates. We must remember that the tendency of the Federal Reserve in estimating unemployment has been to err on the side of pessimism, particularly in the past three years.
What the United States needs to do to recover jobs and return to real wage growth and the path to full employment is both easy and challenging. The United States needs to cut red tape andbureaucratic burdens to new business creation, lift regulatory and fiscal burdens that prevent small and medium enterprises from growing into large companies, and maintain an attractive tax system that incentivizes investment, capital repatriation, and supports job creation.
Anyone can understand this. Why is it challenging, then? In the middle of election year, there are too many misguided proposals from the Left demanding higher taxes, more government interventionism, and more regulatory burdens. It seems that many politicians cannot learn from the mistakes of the eurozone. Higher taxes and more interventionism will not deliver better public services and stronger finances. The eurozone is proof that higher taxes still drove most countries to historically high levels of debt and unemployment while public services did not improve. Deficit spending is not solved by raising taxes, but by cutting unnecessary spending. With a rising tax wedge, growth is weaker, job creation is poorer, and the deficit remains stubbornly high because expenditures rise significantly above receipts in growth and crisis periods.
The prime minister of France, Jean Castex, announced last week at the presentation of the country’s latest tax cut and stimulus plan that “there will be no tax increase. We will not reproduce the past mistake of making tax increases that weaken our growth and send negative signals to both households and companies.” France has one of the highest tax wedges in the world and has suffered stagnation for two decades, high deficits, and constant public service cuts due to the unsustainability of its finances. The United States should not fall into the trap that France is slowly trying to get out of.
The best social policy is one of strong job creation and rising wages. Entitlements do not make a society more prosperous, and ultimately drive it to stagnation.
The employment recovery in the United States has been a positive surprise for most commentators, but the path to full employment will not be achieved putting brakes on job creation and investment.
This is a time in which no politician should be doing anything other than listening to employers, investors, and businesses. Copying European mistakes is not just pointless, it is irresponsible.
An audio version of this article is available here.
As long as I can remember, unions have attacked as “scabs” those willing to accept work for wages and conditions those unions reject, even if it involves crossing union picket lines. In fact, that usage goes back centuries, from English slang for a mean, low, “scurvy” rascal or scoundrel. As Stephanie Smith put it in Household Words:
From blemish…to strikebreaker, the history of the word scab…shows a displacement of meaning from the visceral or physical to the moral register…Just as a scab is a physical lesion, the strikebreaking scab disfigures the social body of labor.
Those union attacks have included some real “fist in your face” examples, such as the following, generally attributed to Jack London:
After God finished the rattlesnake, the toad, the vampire, He had some awful substance left with which He made a scab…No man has a right to scab so long as there is a pool of water to drown his carcass in, or a rope long enough to hang his body with.
Few current examples can match that level of vituperation. But “scab” remains near the surface. For instance, when Illinois Governor Bruce Rauner responded to a 2017 AFSCME strike authorization with a website enabling citizens to apply for government positions, the result was “cries of ‘SCABS’ filling the public airways.”
Union rhetoric asserts that scabs are harmful to workers. But they offer no proof of harm. So as we come to another Labor Day of union claims to advance workers’ interests, perhaps that name-calling should be considered more carefully.
Debaters know to advance their most convincing argument. However, calling someone a scab is an ad hominem (against the man) attack, not an argument. It amounts to “You are bad, therefore your argument/position is wrong.” But “bad” people sometimes have better arguments than “good” people, who can sometimes argue nonsense. Consequently, asserting badness implies nothing about the rightness of any particular argument/position. Given that yelling “scab” is the most frequent, and often only, “argument” unions offer against such people, one could conclude they have no real argument.
Further, even if someone considers you bad, you still retain your unalienable rights from the Declaration of Independence and a guarantee of equal treatment under the law from the Constitution. Those must be equally held by all. Yet denying others the ability to offer their labor services in competition with union members who reject their employers’ offers denies both their economic liberty and their right to equal treatment.
It also denies employers’ rights. An employer holds the right to decide who it will hire or continue to employ. Prior to signing a contract, a worker has no claim to a job. Workers acquire ownership interests in their jobs only if their contract creates one. But unions treat a certification vote as giving members rights to their jobs that would be violated if a scab took them. How did workers, without any individual ownership rights to deny competition from others, conjure up those rights right for themselves as a union, overriding employers’ rights?
In essence, the basis of calling someone a scab is only their willingness to work for less than union demands. But is that bad? If a store offers you lower prices for what you want to buy, you don’t call them names. You seek out bargains, which are the fruit of competition. So what makes monopoly good when your union labor is involved, but bad otherwise? (remember, the Wagner Act had to define labor as not a commodity, or antitrust laws would have made unions illegal). The only reason is narrow self- interest. You don’t want anything to undermine the current terms of your job, even if it was extracted with government-delegated coercive union power. But such a possibility only threatens unions, not workers’ interests.
In fact, it is special treatment of unions, not scabs, that harms workers. At the higher wages unions extract, fewer jobs are available. Those crowded out of such opportunities go elsewhere, increasing labor supply for non-union jobs. That lowers the earnings of existing workers as well as entrants seeking such jobs, which makes up the vast majority of workers. Because higher costs result as well, workers also pay higher prices as consumers and taxpayers.
In other words, scabs should not be demeaned. They are part of the solution to unions’ bleeding compensation from employers beyond what workers could get in an open labor market.
Blame and defamation belongs instead to unions whose “assault and battery” cuts against employers’ interests create “scabs” of those whose only offense is seeking an open market for their livelihoods.
An influential left-wing think tank has called for the government to create millions of jobs for those without a college degree, leading to headlines like The Nation’s declaration that “It’s Time for the Government to Give Everyone a Job.”
One fatal flaw of such a plan was exposed in the comments section of that article, when a commentator named Ira Dember pointed out the perverse incentives that would result if the government guaranteed jobs to only those without a college degree.
Namely, that there is little incentive to undertake the expense of going to college in the hopes of finding employment, when the government will guarantee employment to only those who choose to eschew higher education!
But the underlying notion of this proposal — that the government can solve poverty by creating jobs for those unable to find work — is riddled with economic fallacies.
The logic underpinning a government-jobs program was best epitomized by an advocate who declared that, “The goal in and of itself is job creation. You create the job to fit the person.”
But employment is not an end in and of itself. Rather, it is a means to an end: namely the increased standard of living that the worker obtains by trading his labor for wages.
In a free market, employment is a value creation process — with jobs stemming from the wants and needs of consumers as conveyed through the price system.
It is this productive nature of free-market jobs that make them desirable and capable of increasing a worker’s standard of living.
Wages spring directly from, and are proportional to, the degree in which a job creates wealth by helping to satisfy an unmet need. As is the case for all mutually-agreeable trades in a free market, both sides gain and wealth is created: the worker receives wages that he values more than his labor and the consumer receives a product or service he values more than its price.
In other words, a worker’s wages are reflective of the additional wealth he helped create, which enables his newly improved standard of living.
Because government-created jobs are devoid of this wealth creation process, they are merely a transfer of wealth from taxpayers to the program’s beneficiaries.
This is made clear by taking the argument to its logical conclusion and considering a government proposal that paid one set of workers to dig ditches and the other set to fill them back in. While there would be a virtually unlimited number of jobs that could be created under such a program, there is clearly no value creation of any kind.
Thus, a government-mandated job omits the very thing that makes employment desirable in the first place — value creation.
But it’s even worse than that.
As the great Frédéric Bastiat taught us, we need to also consider that which is unseen.
Every government-created job takes resources away from a private sector job that could have been created otherwise. Even worse, since the government is incapable of possessing the knowledge necessary to determine the most productive means of employment, the trade of one government job for a private sector one will almost always result in a significant loss of value.
Moreover, with a guiding principle that jobs are an end unto themselves, the government is strongly incentivized to engage in the most wasteful projects possible, as those would require greater levels of employment than a more efficient alternative.
While a government job would certainly benefit those currently unemployed in the short term, they too stand to lose in the long run.
The longer these workers stay in make-shift jobs, the less opportunity they have to develop skills that have actual value, a harm that compounds over time.
The best thing the government can do to help those struggling to find work is to get out of the way. Repeal cronyist occupational licensing laws that lower wages and reduce employment. Stop imposing a one-size fits all monopoly form of education that is poorly suited for preparing students for today’s rapidly changing and dynamic job market. Repeal and reduce anti-business taxes and regulations so that entrepreneurs can get back to their work of making us all richer.
A government-jobs program would only make worse a problem that is, for the most part, the result of government intervention.
From crime rates to life expectancy to income levels, statistics at the national level are next to useless when it comes to measuring the daily lives of ordinary people in the United States. This is because the United States — which is a huge and geographically diverse country — is simply too large to be summed up in a single number. This sort of generalizing is inappropriate for pretty much any place that's larger than a single metro area, but it's especially bad when applied to a place like the United States. Even the larger European countries are much smaller, more compact, and less diverse than than US.
The importance of looking at things on a more local level is perhaps most important when looking at issues of homes and home prices. After all, even people who have never studied housing know that housing tends to be highly dependent on local issues, such as climate, local amenities, and access to employment. Many people already know that a four bedroom house in a nice Cleveland suburb is dirt cheap compared to a house of the same size in, say, San Diego, California.
So, it shouldn't be terribly surprising to find that in many parts of the United States, buying a home continues to be quite affordable by historical standards. This fact has started to attract some attention in recent years. In her column titled "Opting Out of Coastal Madness to Live a Low-Overhead Life," Anne Trubek discusses how its possible to live comfortably on $40,000. But here's the rub. To do this, one has to live in an un-sexy midwestern city — albeit in a neighborhood with tree-lined streets and solid, four-bedroom houses.
Statistical data seems to bear this out as well. In June, the Brookings Institution released a new study showing that housing affordability varies greatly from coastal cities to the American interior. And by coastal, they mean "ocean coast." Living near the coastline of the Great Lakes, apparently brings with it even more affordability:
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Source: Brookings
The basic premise of the research is to analyze affordability based on the fact that "U.S. median house prices have been roughly 2.5 to 4 times median income."Comparing current home prices to incomes in each area, the report concludes:
Metropolitan areas with low price-income ratios are located in very different parts of the country from high-priced metropolitan areas (Figure 5). The lowest ratio metros are mostly located in the Midwest, especially clustered around the Great Lakes, and scattered across Texas. The metros with the highest ratios are primarily along the Pacific and Northeast Atlantic coasts. South Florida, Colorado, and several smaller metros along the Southeast coast also rank among the most expensive areas. Across the U.S., most states have more metro areas with price-income ratios in the normal range (2.4-4.3) than metros with outlying values.
Comparing against incomes, of course, is important. It's surely easy to find places where home prices are at rock-bottom levels — in places with depressed economies.
In this case, however, we'll be looking at incomes in relation to housing prices, and it is not at all a given that places with good job markets must also have unaffordable housing.
Texas, for example, has for years had a substantial amount of employment growth. Yet according to the Brookings report, the state has numerous metro areas with "low" and "very low" price-income ratios on housing.
The focus here is on middle-income families, and on for-purchase housing. Low-income households and renters face a different set of challenges, but even middle-income households may daily be told through the media that housing in the United States is quickly becoming unaffordable. Except those articles and news clips tend to focus on housing in places like Seattle, or along the California coast. And there's no arguing with the assertion that places like that are "unaffordable" for many middle-income people.
And as the Brooking article notes, and as I've noted, the lack of affordability in places like California can often be blamed on state and local government measures designed to limit the construction and diversification of housing. Zoning laws and other regulatory barriers to new housing production have decimated housing affordability of housing in many coastal cities. Cities like San Francisco and Seattle have essentially become playgrounds for the wealthy in which existing homeowners fight tooth and nail any attempt to allow sizable amounts of new housing construction. They do this, they tell us, to preserve "the character of the neighborhood." But what they're really doing is using government regulations to drive up the prices on their own real estate, while driving lower-income people further and further out into the periphery. Oh sure, these Progressive guardians of the local "quality of life" might allow a handful of subsidized housing units to be built. After all, somebody has to make your cappuccino or do your dry cleaning. But the overall effect is to ensure few people can afford to move in.
[RELATED: "How Governments Outlaw Affordable Housing" by Ryan McMaken]
This issue, however, is far less prominent in the un-stylish cities of the interior where city officials still welcome new construction and new housing — and where there's a greater abundance of less-expensive land.
Still Affordable by International Standards I started out by noting it's a bad idea to ignore the enormous regional differences in the United States when considering aggregate data. And that's true.
It is interesting to note, however, that even when we include the price of California and New England coastal housing in our analysis, housing in the United States is still less expensive than in most other wealthy countries.
According to the OECD, housing expenditure in the United States is 18 percent of gross adjusted disposable income. That's the third-lowest in the OECD. Moreover, housing costs in the US by this metric are only 75 percent the size of what they are in Denmark and the United Kingdom. US costs are 78 percent the size of housing costs in Italy.This data point includes rental housing. See: "Better Life Index, Edition 2017" https://stats.oecd.org/Index.aspx?DataSetCode=IDD
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Americans also tend to get more living space for what they pay.
[RELATED: "American Houses Keep Getting Bigger — And so Does American Debt" by Ryan McMaken]
For example, the OECD notes that in the United States, there are on average 2.4 rooms per person. Only Canadians have more rooms per person. In Switzerland, Spain, Denmark, and Japan, however, there are only 1.9 rooms per person. That's one-fifth less than the average in the US.Rate = number of rooms divided by the number of people living in the dwelling. OECD states: "This indicator refers to the number of rooms (excluding kitchenette, scullery/utility room, bathroom, toilet, garage, consulting rooms, office, shop) in a dwelling divided by the number of persons living in the dwelling."
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And the number of rooms aren't the only metric by which US homes are bigger. According to the BBC, floor space in newly built homes in the United Kingdom is less than half of what it is in the United States:
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Federal Policy Favors Those Who can Get Into Expensive Markets As the Brookings report notes, however, federal policy puts homeowners in more affordable markets at a disadvantage by favoring rapidly appreciating real-estate in pricier markets:
In low-priced areas, even families that have paid down their mortgages find it difficult to build wealth. That makes it harder for them to supplement retirement savings or borrow against home equity for their kids’ education. Federal tax policies that strongly favor owner-occupied homes over other asset types are not well suited to support middle-class wealth building in lower-price locations.
Another new study, recently profiled at Bloomberg, shows how post-2008 banking regulations favor building wealth through high-priced real estate over other options, such as building a family business.
So, for middle income people in a city where home prices are not appreciating very much, owners will be at a disadvantage — thanks to federal tax and regulatory policies — more than someone who sacrifices other important household expenses in order to live in a pricey market.
When it comes to simply putting a roof over one's head, however, there are still many markets in the US where it's possible to buy a house at a price that's manageable for middle-income households. It's true that these places are not the glittering stylish cities often featured in movies and sitcoms.
Those places tend to be controlled by wealthy Progressive elites who don't want anyone new moving in.
When it comes to the immigration debate, very few people advocate for either totally closed borders or totally open borders. However, as soon as it is admitted that at least some movement across borders ought to be allowed — or that at least some of the migrants are to be regulated — the question quickly arises: which migrants are to be allowed, and which are to be prevented entry?
Rhetorically, this problem is often dealt with today by an appeal to government authority. Namely, it is often stated that "legal" immigrants are fine, but "illegal" immigrants are bad.
This, of course, misses the point. The question still remains: which immigrants ought to be considered legal and which illegal? What ought to be the standard of determining legality?
The History of "Undesirable" Migrants In the nineteenth century, immigrants were said to be either desirable or undesirable based on specific traits. Immigrants that were determined to be unable to work, mentally ill, prone to criminality, or likely to become dependent on state assistance were deemed undesirable. This was — at least in theory — applied across the board, regardless of country of origin. Prior to the 1880s, this determination was usually made by state or local authorities. And those who were deemed undesirable could also be deported.
These sorts of laws go back to pre-Revolution times and even back to England in some cases, where "poor laws" were introduced to regulate vagrants and what we would today call "welfare recipients." Local governments were empowered to prevent the local poverty-relief funds from being overwhelmed by new residents looking for what we'd today call "social benefits."
State-based restrictions on movement, for example, were written into the Articles of Confederation which noted interstate movement was not guaranteed to "paupers, vagabonds and fugitives from justice."
Later, states that received large numbers of foreign migrants, such as Massachusetts and New York, focused on refusing entry to people suspected of being mentally ill, physically disabled, potential paupers, or criminals.
Note, however, that these laws set out specific criteria for individual persons. Those who were deemed able to support themselves and be no burden on the public purse were allowed to stay.
Even national policy — most of which failed to gain passage in Congress — directed federal officials to ensure that new immigrants "were not paupers, nor convicts."
Thus, it is not surprising that Gerald Neuman concludes in his survey of nineteenth-century immigration policy: "Neither Congress nor the states attempted to impose quantitative limits on immigration" [emphasis in the original].
Later Attempts at Quotas The Chinese Exclusion Act of 1882 signaled the first attempt by the federal government to enact general peacetime exclusions of people based on group membership.
But even that idea did not work its way into the first broad national policy found in the Immigration Act of 1891. The 1891 legislation continued to stick to the policy of excluding people based on undesirable traits found in individuals. Historian Hidetaka Hirota lists the criteria:
The 1891 law also expanded the excludable category to cover people with mental defects and insanity, paupers and people "likely to become a public charge," people with contagious diseases, people convicted of a felony of other crime involving "moral turpitude, polygamists, and assisted emigrants" — making all of them deportable.
It was only in the twentieth century that federal policies then turned toward quota systems.
The Immigration Act of 1917 expanded bans on immigrants from Asia, above and beyond the Chinese exclusion. Sticking to the policy of individual litmus tests, however, the new legislation also required literacy tests of new immigrants.
With the 1924 Immigration Act, however, true quotas were introduced for the first time. The quota was
set at three percent of the total population of the foreign-born of each nationality in the United States as recorded in the 1910 census. This put the total number of visas available each year to new immigrants at 350,000.
The restrictions did not apply to migrants from the western hemisphere.
But why set the quota as a percentage of foreign born as recorded in the census? Is this based on any objective standard?
Of course not. It's a number pulled out of thin air by politicians. Moreover, adopting an arbitrary number for the "correct" number of immigrants from a certain country is akin to declaring a quota for the "correct" number of shoes to be imported into the country. Nor are government agents qualified to determine the "correct" number of tons of steel or pounds of sugar allowed into the country.
[RELATED: "Only the Private Sector Can Determine the 'Correct' Number of Immigrants" by Ryan McMaken]
Those who support such quotas will nevertheless often attempt to mask their arbitrary nature by claiming anyone who opposes quotas is for totally open borders.
But, as Neuman noted, the border-control scheme that prevailed during the nineteenth century — one that refused entry to presumed paupers and criminals — was anything but an open-borders situation.
There is no denying that the border controls were difficult to enforce. Much of this was due, however, to the technological limitations of the time.The tools available to states and towns in identifying those who were ill or disabled were extremely limited. Moreover, it was difficult to determine ahead of time if new migrants were likely to become dependent on state services.
To deal with this state governments began to require bonding from those involved in the importation of migrants. Neuman writes:
Beginning in 1820 ... Massachusetts returned to the colonial system of demanding security from masters of vessels when their passengers seemed likely to become paupers. The 1820 statute required a bond to indemnify the town and the Commonwelath for expenses arising within three years with respect to any passenger lacking a settlement in the Commonwealth who was considered liable to become a public charge.
This law was later modified in 1837, including new provisions under which
the master was forbidden to land without bond any alien passenger found upon examination to be within a group of categories of persons presenting a high risk of becoming a public charge, including those with mental or physical disabilities.
The bonding requirement went even further in 1852 when:
the state authorized officials to demand bond or a higher commutation payment to cover passengers whom they judge to present an intermediate risk of future indigence ... [after the bonding requirement for intermediate-risk migrants was abolished in 1872] Bonding of high risk passengers continued ... as did a newer requirement of bonding by corporations importing labor into the state.
Similar laws were adopted in other port cities, especially New York, and applied in attempts to minimize costs associated with new migrants turned paupers.
The focus, of course, was not on overall numbers, but on avoiding costs associated with new migrants who were unable or unwilling to support themselves.
Unlike a blanket quota system, the targeted approach is more rational, non-arbitrary, and attempts to get at the true heart of most political objections to immigration — namely, that new migrants will become a drain on public amenities or engage in criminal behavior.
Given the problems and expense of general enforcement, however, it's easy to see why the Massachusetts legislature turned to bonding as shifting the burden of pauper immigrants to those who "sponsored" them in some way.
The Individual Approach Is Better Indeed, a system of sponsoring migrants through bonding has potential as a far more reasonable means of insuring that new migrants are actually being invited into the destination country, and will not become public charges.
Tho Bishop, for example, has examined this issue in light of refugees, but it can be applied to all sorts of migrants. Ryan Khurana has also written on the potential for sponsorship-based migration policies.
After all, if an employer, family members, or church organization wishes to invite a new migrant into the country to work or live, a basic respect for the rights of private property and free contracting would prohibit the state from interfering. However, if there remains a concern that the new migrants might live off the public purse, the strategy of bonding would be far less disruptive and arbitrary than government-invented quotas on how many migrants are to be allowed entry.
If migrants go on the public dole, or engage in criminal behavior, bonding would allow for the taxpayers to recover their costs from the sponsors. The migrant in question would presumably be deported for breaking the bonding agreement.
The superiority of this system over the general quota system is evident since it would allow for private organizations to freely engage with employees, contractors, and family members who would be arbitrarily excluded under a quota system — even if they did not engage in criminal behavior or fail to support themselves financially.
Some anti-immigration hardliners might nevertheless take exception to this, claiming that it is administratively too costly. By arguing this, however, they would essentially be making the collectivist claim that private property rights can be voided for entire groups of people based on assumptions about one small portion of the group. We hear similar arguments when opponents of physical cash claim cash ought to be abolished because some people use cash for criminal enterprises. There's no denying that some criminals use cash. Is this therefore justification for destroying the property rights of all users of cash? Clearly not. Nevertheless, arguments in favor of broad quotas or outright bans on migrants based on group membership employ this essential logic.
Last week Ryan McMaken commented on Chinese billionaire Jack Ma's prediction that our grandchildren's work day would shrink to four hours. I agree with Ryan's assessment of Ma's prediction, supported with the facts about how many fewer hours the average work day is today compared with the past. But looking at averages can be deceiving. The work day hasn't shrunk for everyone, and won't shrink for many.
For people engaged in manual labor, or whose jobs just involve following the instructions of their supervisors, a shorter work day is feasible and probably desirable. For knowledge workers, work time adds to their human capital, so knowledge workers who want to get ahead must work long hours.
Cashiers and assembly line workers could work shorter hours without reducing their hourly output, and if shorter hours reduced fatigue, their hourly output might even rise. But jobs like corporate CEO just can't be divided and maintain the same level of productivity. CEOs make decisions that have huge impacts on the direction of their companies, and the more time the CEO spends gathering information and assessing alternatives, the more productive the CEO will be.
Worker productivity often depends on tacit knowledge which cannot effectively be communicated to others. The person with the knowledge is the only one who can use it. Workers in those positions cannot work shorter hours and maintain the productivity of workers who work longer hours.
Even secretaries will often be more productive if they have an understanding about how an office works and what has happened throughout the work day. A secretary in the office all day will have a better understanding of its activities that one who comes in for the afternoon and may not know what happened in the office that morning.
Knowledge workers will be more productive if they work a full work day, which means that a knowledge worker who works an eight-hour day cannot be replaced by two workers who work four hours each. The work day won't shrink for ambitious knowledge workers who want to get ahead.
Why do corporations pay such high salaries for experienced CEOs who have been out of school for decades when they could more cheaply hire new Harvard MBAs who have the most up-to-date education? The reason is that years of experience have produced tacit knowledge that cannot be gained through the education system. Someone working four hours a day will accumulate only half the experience of someone working eight hours a day, and we know that in some occupations, 60 to 70 hour work weeks are the norm.
For some jobs, a four hour work day is very feasible, but in a knowledge economy, many jobs will continue to demand longer hours.
Somehow, an all-star Hollywood cast created The Company Men (2010) and it got past the usual censors. The movie is an effective rebuttal to Arthur Miller's 1949 Death of a Salesman. The recently-laid-off characters spend the movie living their lives after rounds of layoffs. In doing so, they effectively act out a debate between a proponent of communism — Karl Marx, and a proponent of the free market — Carl Menger.
Set during the 2007/2008 financial crisis, The Company Men, now streaming on Netflix, takes a look at how the crisis impacted white collar workers and those around them. Even the sympathetic look at white collar workers was a refreshing take in itself, with white collar workers so commonly having been glommed into the category of "oppressor" in popular culture post 2007/2008.
The Company Men follows the lives of three men who were laid off: a 60-year old junior executive who worked his way up from the factory floor as a welder (Chris Cooper), a 70-year old senior executive who seemed too well-connected to be fired (Tommy Lee Jones), and the best salesman in the company — a 37-year old hotshot with a big team (Ben Affleck).
While not a deep examination, the film offers an insightful survey of pain felt in their lives and the lives of the those around them, as the impact ripples beyond the person fired.
[RELATED: Doug French's 2011 Review of The Company Men]
The movie hinges on the idea that your employer owes you more than a paycheck. The filmmaker plays with that idea, going so far as to present the idea that an employer owes you a lifetime commitment to a job, and at a different extreme, that your employer at least owes you notice when they are going to fire you. The emotion that such limited thinking introduces to the healing process, as can be expected, made the ability of the characters to get beyond the firing more difficult and more painful.
The act of looking into the past and dwelling there, rather than moving on and adjusting to the new reality that they were now without a job, impeded the forward progress of the characters. Also dwelling on the fact that the employer owed them more than a paycheck would have benefited the fired employees to have moved on as quickly as possible.
Arthur Miller Is Still With Us Arthur Miller's voice can practically be heard in the film's dialogue as the characters talk about the system that they trusted, which used them up and heartlessly spit them out. Miller-like, superficial explanations of how the worker was exploited is present in the film.
The Company Men is no denunciation of capitalism though, as Miller would have it. It's a denunciation of those who would not fend for themselves and who would instead naïvely expect to be swaddled in the loving arms of a gigantic employer forever.
After spending most of the movie revolving around that topic and working through all kinds of jeremiads about what justice is, one of those laid off finds inspiration in underutilized assets. The recently-fired executive purchases an underutilized shipyard — the firing company's original shipyard — and begins a company of his own by buying that shipyard and stating his intent to some of his former employees to nurse that original shipyard back to prosperity. They happily join his team at a reduced salary, eager to help him make his business plan into a reality. In his entrepreneurship, the tension of the movie finds resolution.
Victory! Victory is had by the end of the movie. It was a victory over an inner self — a self that tried to blame the employer for the firing rather than to accept as quickly as possible that an employer that fires you is an employer that you no longer bring benefit to. There is no clearer way that an employer can express that you are not worth the cost of employing you.
The white collar workers in the movie stopped providing value for their employers and whined about it in various ways. There was no run-of-the-mill social justice-y poetic justice for those who led the mass firing, for they fittingly got rich by movie's end, commanding the company's resources expertly as they made the company lean.
There was however, poetic justice for those who thought clearly as well as for those who failed to think clearly — the quicker a character came to recognize that he had stopped providing value to the employer and concluded who he could provide value for, the better off the character was. To take it even further, the character who was least able to adjust and to move on ended up dead at his own hand.
From the movie a handful of additional lessons could be taken away. Living beyond your means is certain to cause an unpleasant belt tightening at some point. Not preparing for the future will almost certainly cause you to one day regret that decision to not prepare. The more in touch you are with the reality that no one owes you anything — not your former employer, not your business contacts, not your former employer's competitors — the better off you will be at fending for yourself and your family in difficult moments.
It's the Customer, Stupid The Company Men subtly raises the question "Who is the customer for your work?" If you are an employee, then the employer is the customer for your work. If you are a manufacturer who creates products for retailers then the retailer is the customer of your work. If you are an entrepreneur in the retail space then the end consumer is the customer for your work. The customer is who you need to seek to provide value for. The longer into The Company Men that it took someone to answer this question of who the customer is, the longer it took them to recover from the firing.
Related to the concept of who the customer is, is the question "Who is the audience?" This is a question that must constantly be asked. To put this question into longer form, "Who am I speaking to right now and how do I speak to them so that this is the best way of communicating this message for them at this moment?"
Just as the customer is the person you are in an economic exchange with, the audience is the person that you are in an intellectual exchange with. Adjusting to that mindset of being attentive to the audience and the customer was a key focus of the movie as it showed the folly of not doing exactly that.
Again, the Labor Theory of Value Fascinatingly, the movie boiled down to a Marxist v. Free-Market debate, and fell on the side of the free markets. This was a detail that the star-studded Hollywood cast likely neglected to recognize (starring Ben Affleck, Tommy Lee Jones, Kevin Costner, Chris Cooper, Craig T. Nelson, and being a Weinstein Production). It would take someone versed in the labor theory of value and subjective value theory to recognize the praise for the marketplace and the individual that are implicit in the film's plot.
To the usual Hollywood censors, the movie would appear like nothing more than how callous corporate downsizing damages lives and how hard it is to rebuild.
Marx would likely say about value, in relation to this movie, and how it is derived by the worker, as he did In his speech "Value, Price, and Profit" to the First International Working Men's Association in June 1865: "The value of a commodity is determined by the total quantity of labor contained in it." In the same speech, Marx goes on to distinguish between "paid labor" and "unpaid labor," laying some of the intellectual groundwork for why profit is "exploitation of labor," as he argues in this speech, and which, after a century and a half, pouty Marxists continue to argue.
In 1867 in Das Kapital, Marx gives some minimal distinction that value isn't purely about the labor that goes into it when he hits on the concept of work being "socially useful."
That would be a common Marxist view about the relationship between employer and employee. And this movie spends a great deal of time sliding into that tendency, debating from the perspective of the labor theory of value, espoused by Marx and many others before him.
Carl Menger, founder of the free-market Austrian school of economics, as he did in his seminal book Principles of Economics (1871) would say in contrast:
The measure of value is entirely subjective in nature, and for this reason a good can have great value to one economizing individual, little value to another, and no value at all to a third, depending upon the differences in their requirements and available amounts. What one person disdains or values lightly is appreciated by another, and what one person abandons is often picked up by another.
Menger, in line with this movie, might soberly advise that if your employer (the consumer of your labor) no longer wants you, that is a sign that you have ceased to bring value and had best move on and find some other consumer for your work who is more likely to find you valuable.
Finally, a Hollywood Victory for Menger A Marxist v. Free-Market debate is had through the course of this movie, with the free-market Austrians prevailing, and the most angry Marxist in the film driving himself to an early death. That the angriest Marxist sports a McCain bumper sticker and certainly sees himself as a Republican makes his self-destruction at the hands of his firmly held belief in the Marxist labor theory of value all the more interesting to watch, though it is not clear what the filmmaker is intending by the subtle placement of the bumper sticker.
The film The Company Men, as a response to the 1940's anti-capitalism of Death of a Salesman, and as a response to popular out of touch jeremiads of our age, is excellent. As a survey of these false ideas, it is a film that can easily encourage ancillary discussions to follow from its watching, making it an accessible, easy to watch foundation for classroom discussion, or family and friend discussion on Menger, Marx, and the free market.
This week America celebrated its Independence day, a holiday dedicated to honoring, as Ryan McMaken noted, "a document that promotes secession, rebellion, and what the British at the time regarded as treason." In spite of our own government's attempts to hijack it for simply another celebration of sterile patriotic pride, the success of America's inherently radical revolution is a moment of history that must not only be remembered, but emulated in the future. After all, as Jefferson said, at times "it becomes necessary for one people to dissolve the political bands which have connected them with another," remains as relevant today as they were in the 18th century.
Our old friend Richard Ebeling joins Mises Weekends to discuss the health of, and future prospects for, the Austrian school. There are far more Austrian and Austrian-friendly thinkers in academia, business, and the financial industry than ever before. Richard attended the famous South Royalton conference, so he knows just how far we've come. But are Austrians making real progress against the dominant neo-Keynesian orthodoxy? Are we growing on a per-capita basis? And what would Hayek, Rothbard, and Margit von Mises — all of whom Dr. Ebeling knew and spent time with — think of Austrian economics today?
And in case you missed them, here are this weeks Mises Wire articles, covering a wide array of topics including: various types of government protected monopolies; politically incorrect American history; the idiocy of central bankers, home and abroad; the misinformation surrounding minimum wage law enactment; and what we is July 4th really about.
The Flint Water Disaster Shows Why We Need Markets by Christopher WestleyTestosterone and the Madness of Central Bankers by Doug FrenchThe US Is Not "One Nation" — And it Never Was by Ryan McMakenWe Don't Need a Presidential Commission on Voter Fraud by Ryan McMakenLew Rockwell on The Origins of the Mises Institute by Lew RockwellThe Left/Right Crack-up Over Seattle and the Minimum Wage by John TamnyMoney, Keynes, and History by Friedrich A. HayekThe Great War, 100 Years Later by T. Hunt TooleyThe Austrians, the Mainstream, and "Mainline" Economics by Nicolai J. FossWhy Civilization Needs Money by Ludwig von MisesTrump's Maoist Steel Obsession by Jonathan Newman3 Things to Remember on Independence Day by Ryan McMakenFive Articles for the FourthThe Death of the European Banking Union by Louis RouanetWe Must Declare Independence by Ron PaulBeware the Predictions of "Experts" Like Janet Yellen by Ryan McMakenHere's an Easy Way to Add Some Market Competition Back into Healthcare by Mark Thornton
A Car for the Masses When Henry Ford came up with the Model T, his goal was to build a car for the masses. Although history teachers typically present this as pertaining to price, Ford actually had to do much more than make his automobile cheaper. In fact, when the Model T was released in 1908, it initially sold for $850, compared to the Model N’s $500 price tag in 1906. As early as 1901, the Curved Dash Oldsmobile — designed by Ransom Olds — sold for only $650.
But the cost of owning a car went far beyond the sticker price. Few people knew how to drive, so it had to be easy to learn for those who were not rich enough to hire a professional driver. One way that the Model T simplified driving was by adopting a transmission that made it easier to change gears and allowed the car to drive in reverse. A car for the masses needed to accommodate diverse populations. Gasoline-powered cars were already the norm, but gasoline itself was not. Rural Americans had no gas stations, but they already purchased kerosene for their tractors, and many could produce ethanol themselves. Any of these three fuel options could power the Model T.
The design also needed to be reliable and easy to maintain. The Model T adopted a more reliable cooling system. Water loses density as it heats up, so Ford’s engineers figured that a tube at the bottom of the radiator would feed cool water to the engine, while another tube at the top would receive the hot water, replacing the mechanically vulnerable water pump with a passive system built around thermodynamic principles. In the early years, Ford added valve covers to the engines to protect them against oil loss and contamination.
Contrary to the common narrative, Ford’s goal was not to build a cheap car; it was to build a reliable car that would be easy for people to operate and maintain. Once those goals were met, Ford turned his focus to reducing the cost of production.
To this end, Ford’s greatest contribution was not a grand innovation but a synthesis of existing systems of production. Adam Smith famously described the specialized division of labor used in eighteenth-century pin factories. Eli Whitney used interchangeable parts for the production of firearms as early as 1801, establishing the “American system of manufacturing.” Ransom Olds first brought these concepts to automobile production by using a stationary assembly line to produce his Curved Dash Oldsmobile. When Ford unveiled his moveable assembly line, he credited the idea to Chicago meat-packers, who used a similar process to disassemble animal carcasses.
The moving assembly line dramatically increased the rate at which a given number of workers could assemble a vehicle. Ford ended up applying this manufacturing concept to every level of production, from the assembly of specific components up to the hanging-chassis assembly line which produced the final product in forty-five operations. By 1916, Americans could buy a Model T for only $360.
More Money, Less Work, No Unions Ford’s efficient manufacturing process had an unanticipated cost: it was boring. As Ford described the process in his autobiography:
In the chassis assembling, there are forty-five separate stations. … The man who places a part on does not fasten it. … The man who puts in a bolt does not put on the nut; the man who puts on a nut does not tighten it.Henry Ford and Samuel Crowther, My Life and Work (Garden City, NY: Garden City Publishing, 1922), 83.
Ford was trying to describe why his process was so efficient, but he unintentionally also explained why his company had a staggering worker turnover rate of 370 percent in 1913. In that year, the Ford Motor Company was earning annual profits of $27 million on $90 million in revenue, but it could not keep its factories staffed. Up to that point, entry-level workers earned $2.30 a day for a nine-hour shift. But nine hours spent turning a lug nut is hardly an attractive job when competitors — such as General Motors, the conglomerate formed from Ransom Olds’s ventures — paid similar wages for less monotonous work. So in 1914, Henry Ford announced that none of his workers would earn less than $5 a day working eight-hour shifts. He also offered eighteen paid days off for vacation and illness, an uncommon practice at the time, especially for unskilled workers.
The pay increase was set up as a profit-sharing system rather than a simple wage, with conditions attached. Workers still made their original base wages for merely fulfilling their jobs, but those who met certain personal requirements could earn a maximum of $2.70 per day extra, allowing the raise to apply equally to all workers, even those who made more than the starting wages. The strings Ford attached to the raise are a common source of criticism, but it is difficult to understand why. Workers who did not want to meet the conditions could still find employment at the factory at the original wages and still enjoy a slightly shorter work day, and the conditions Ford attached to the bonus included things like contributing to a personal savings account and not physically abusing your family. Of course, those who opposed these strings could still seek employment elsewhere, just as they had already been doing.
But workers apparently had no objection to Ford’s conditions for the extra wages. Workers flocked to Detroit to get jobs, and those who had them decided that monotonous work was more bearable with the new perks. But it does not do justice to the policy to say that Ford increased the livelihoods of his own employees. By 1914, Ford Motor Company was an enormous employer and one of the most famous businesses in the country. The good press Ford received from the decision put pressure on other companies — not only competing automobile manufacturers — to similarly increase pay, shorten the workday, and add vacation days. He also paid African American workers the same wages as white workers, reducing the ability of employers to benefit from a culture of racial discrimination by paying black workers less than white ones. By 1926, when Ford similarly advertised his decision to reduce the work week from six days to five, he essentially established modern employment standards: the forty-hour week, eight-hour day, vacation and sick days, and standardized wages.
Henry Ford, Unions, and the Government It is also important to contrast the gains of Ford’s reforms with the competing attempts to achieve similar outcomes. Union organizers had been agitating for eight-hour workdays for a century, with little to show for it. A handful of industries — usually only within a given locality — had agreed to eight-hour workdays in response to labor strikes, but the affected workers were a drop in the bucket for America’s workforce despite decades of agitation. Furthermore, even when unions did achieve some victory, it either explicitly excluded racial minorities and immigrants—both of whom enjoyed equal wages at Ford — or ostensibly agreed to universal wage rates for the purpose of protecting white workers from black competition, which was the motivation behind the earlier minimum wages laws.
Where unions had an impact, there were negative consequences, especially for African Americans. But even without these problems, the change they effected was far too modest to credit unions with the forty-hour workweek, as they frequently are. Ford despised unions and would not allow them at his factory, yet he not only met, but exceeded, the union demands of his day: whereas unions generally called for an eight-hour day with no reduction in pay, Ford more than doubled wages. Even for companies such as General Motors, which did have unionized workers, the unions get credit for reforms that they never won until Ford Motor Company threatened to lure away their best employees, shifting the turnover problem from Ford to his competitors.
As part of the New Deal, well after Ford’s reforms, the 1938 Fair Labor Standards Act helped further standardize the eight-hour workday and the weekend by setting a federal minimum wage that mandated overtime pay for anybody working more than forty hours per week. Unlike Ford’s reform, in which the adoption of an eight-hour day was accompanied by a substantial increase in pay, this act brought the eight-hour workday to those who did not already have it at the expense of their wages. Even if workers wanted to work longer hours to earn more money, employers were now incentivized to deny them this opportunity.
These reforms, of course, also did not come with any benefit to the consumer. Ford designed an automobile that the average American could both afford and operate. It was because of this accomplishment — laudable by itself — that he was able to reduce the hours his employees worked while increasing their pay and benefits, avoiding the unintended consequences that follow union agitation and legislation.
Those who recognize that Ford deserves credit for these positive changes often accept the myth that he made his reforms for moral reasons. While there is no doubt that some of his policies followed moral motivations, such as the demand that his workers save money and refrain from physically abusing their families, this idea predominantly derives from Ford’s own marketing of the policy. He famously publicized his 1926 reform by citing the hours one of his entry-level workers had to work to afford a Model T, cultivating the myth that he paid high wages because he wanted his workers to afford the product they built.
Ford certainly wanted working-class people to afford his car, which is why he worked to reduce its cost, but the wage reforms were born out of the need to retain workers, and the eight-hour work day was a logical way of keeping his factories operating twenty-four hours a day, divided into eight-hour shifts. The important insight is that capitalism does not depend on kind-hearted employers to produce positive change; the competitive profit-and-loss mechanism works naturally to incentivize these outcomes while reducing the unintended consequences of such changes.
As Houston continues to deal with the devastation of Hurricane Harvey, Florida stands prepared for the impact of Irma. It is during times of crisis like this, when government feels the greatest need to control, that sound economics is most needed. This is why laws on "price gouging," no matter their intent, bring tragic consequences. This is also how government intervention in insurance markets has only increased the costs of flooding. Unfortunately, there are still those who see the damage done by these storms as a good thing for the economy. Of course, such a dangerous misunderstanding of economics may qualify such pundits for one of the vacant Federal Reserve positions.
On Mises Weekends, we shift our attention from a natural disaster to a man-made one. Our friend Scott Horton joins Jeff to discuss his important new book — Fools Errand: Time to End the War in Afghanistan This is the definitive treatment of the war itself, the history and factions involved, and the disturbing policy mindset that keeps this deeply unpopular conflict churning. Don't miss this interview with one of the leading antiwar libertarians of our time.
And in case you missed them, here are this weeks Mises Wire and FedWatch articles, covering a wide array of topics:
Trump's Deal With Dems Increases His Power over GOP by Mark ThorntonWill Low Unemployment Cause Accelerating Inflation? by Frank ShostakSlow Wage Growth Could Be Thanks to 'Sticky Wages' by Curtis WilliamsWhy the War Party Loves to Call Foreign Leaders Insane by Ryan McMakenTrump's Historic Opportunity with the Federal Reserve by Tho BishopThe Progressive Era Still Haunts Us Today by Patrick NewmanStanley Fischer Is Out at the Fed by C.Jay EngelBank of Canada Raises Interest Rates ... Again by Caleb McMillan3 Good Things about "Price Gouging" by Robert P. MurphyHow the Feds Blocked Effective Flood Insurance by Dale SteinreichMarkets, Not Government, Improve Race Relations by Richard M. EbelingBank of Mexico: Bread Today, Hunger Tomorrow by Edgar OrtizWhy Government Cannot Be Run Like a Business by Peter G. KleinThe Broken-Window Fallacy Is Still Alive and Well by Robert A. McKeownDoes Government Spending Create More Economic Growth? by Frank ShostakPublic Policy Always Costs Somebody Something by Gary Galles
The Violence Against Women Act (VAWA) embodies a political trend that cripples human rights in the guise of crusading for them. This trend is the balkanization, or fragmentation, of rights. Recently passed by the House, VAWA has moved to the Senate, where the trend it represents may well be translated into more law.
Identity politics and its activist branch, social justice, claim to champion oppressed groups. Yet both reverse the process by which oppressed groups have historically claimed their freedom: the universalization of rights. The term “universal rights” means that every human being, simply by being human, possesses the same rights and to the same degree as everyone else. Freedom means every person has an identical and enforceable claim to his or her own body and to peacefully acquired property. Justice occurs whenever this claim is enforced.
The progress of freedom and justice can be charted by scanning history for how rights gradually expanded to include an ever-widening circle of groups until every single human being enjoyed their protection. The Magna Carta (1215) extended basic rights to English nobles in order to protect them from the king. This is how universal rights typically begin; powerful elites force authorities to expand their legal protections through state privilege and, then, more and more groups claim human rights until they come down to a matter of birth. A hard-fought extension of rights occurs: they spread from landowners to men who have other specific “qualifications” like being white, then to women with the same qualifications, and, finally, to all human beings without qualification. The end point is when no one’s rights are based on secondary characteristics such as race, gender, or status. Every person has a vested interest in respecting the rights of others because his own rights depend on it.
Identity politics heads in the opposite direction. It claims special rights for allegedly oppressed groups—most notably women and blacks or other minorities. Rights are no longer based on a shared humanity but on secondary characteristics. Rights are balkanized rights, with the “rights” of one group differing from and in conflict with those of other groups: women versus men, minorities versus whites. Every group has a vested interest in having their “rights” triumph over those of others, because benefits will flow to them from the vanquished group; the claimed “rights” are more accurately called privileges or entitlements.
To understand how the balkanization of rights manufactures conflict, it is useful to examine the dynamic up close in microcosm. VAWA was recently reauthorized by the House and has moved to the Senate for approval. The purpose of the Act is to provide grants to programs that prevent sexual violence against women or assist its victims. In short, the “oppressed” group it allegedly champions receives entitlements at the expense of another group—men—who are either dismissed as victims or blamed as perpetrators.
Consider just one section of VAWA: Title IX, Safety for Indian Women. Except one mention in passing, the section does not acknowledge the alarming abuse of Indian boys and men, let alone advocate for them.
Those who drafted the new VAWA must be aware of current statistics and data on the abuse of Indians. One example: a state bill in Nebraska, LB 154, mandated that the Nebraska State Patrol produce “a report on missing Native American women in Nebraska” to be submitted in June 2020. The twenty-one-line bill mentions “Native American women” six times—boys and men not at all. Ordinarily, being left out of a government action is a good thing, but such bills are a vital part of creating a twisted narrative that sets society at war with itself.
Fortunately, the researchers went beyond the mandate of “missing women” to provide a more accurate picture. A May 23, 2020, article entitled “Nebraska State Patrol Study: Boys Make Up Majority of Missing Native Americans” appeared in the Omaha World Herald. A surprising statistic was presented. “The greatest percentage of Native American missing persons are boys age 17 or younger, accounting for 73.3% of all Native American missing persons in Nebraska.” Native American boys account for 59.6 percent of all missing people in the entire state.
The reaction of bureaucrats, politicians, and the media was appalling but typical. In the conclusion of the study, Judi M. Gaiashkibos, executive director, Nebraska Commission on Indian Affairs, addressed only “women and children.” She lamented “actions and policies” that “have displaced women from their traditional roles in communities and governance and diminished their status … leaving them vulnerable to violence.” State senator Tom Brewer, who cosponsored LB 154, stated, “We need all law enforcement to communicate and work together to address the exploitation and victimization of Native women.” A Lincoln Journal Star article on LB 154 was entitled “Senators want to step up investigations of missing or abused Native women.” Men and boys are nowhere.
VAWA conspicuously ignores inconvenient studies and cherry-picks the ones it deems to cite. The section on Native American women’s safety opens, “More than 4 in 5 American Indian and Alaska Native women, or 84.3 percent, have experienced violence in their lifetime.” This statistic is drawn from a National Intimate Partner and Sexual Violence Survey (NIPSVS), “Violence against American Indian and Alaska Native Women and Men.” In citing the disturbing statistic, VAWA makes a curious omission. Immediately after the 84.3 percent figure, the NIPSVS reads, “More than 4 in 5 American Indian and Alaska Native men (81.6 percent) have experienced violence in their lifetime.” In other words, Native American men experience only 2.7 percent less violence than women. Why does this data not make it into VAWA?
For one reason alone: it shows that women and men tend to be victimized by violence at similar rates. Those who twist the statistics are not indifferent to suffering of boys and men; they are afraid of it. In an honest discussion of sexual violence, including domestic abuse, their preferred group would not “win” the oppression game and be awarded the oppression prize.
Instead, the identitarians present a parody of human rights in which only approved groups are recognized as victims. Unapproved individuals are lost in the balkanization despite the fact that, in the final analysis, only individuals suffer and cry out for help. Individual human beings do not count, however. Only those who share the secondary characteristic of approved genitalia receive compassion. This means it is not compassion at all. It is politics, as cynical as it comes.
With so much debate about wokeness, perhaps the violence aimed at Native American males will be the point at which society says “no more,” no more institutionalized misandry. The balkanization of rights must stop.
Are supporters of the minimum wage law criminals? Possibly, but not necessarily. Consider the following contention. Merely verbally advocating for "public policies" like the minimum wage constitutes illicit threat, and the perpetrators of such speech should be charged with the "direct" crime of threat in the libertarian Nuremberg trial, not just as "indirect" accessories of the state apparatus. Suppose someone publicly announces that he will send a team of people to beat some people up, and persuades others to support his plan. That is certainly an illicit threat. Well, if the government holds a referendum on whether to implement the minimum wage, and someone publicly announces that he intends to vote "yes" on the resolution and persuades others to do so, it seems that this is of the same nature of the aforementioned scenario. Similarly for an announcement that he will ask "his" congressman to vote for a certain rapacious bill in congress.I can’t bring myself to agree with this analysis, but I am in awe of its beauty. The aesthete in me cries out in appreciation at this way of looking at the matter.Why can’t I agree with it, even though I greatly admire it?Consider the following. A rams his car into C’s automobile, because A hates C and wants to damage the latter and his property. A, here, is clearly a criminal. B also rams his car into C’s, but B bears C no ill will. B’s infliction of damage on C’s property was totally accidental. Is B, too, a criminal like A? No. B is only a tort feasor. B owes C only an amount sufficient to make C “whole” again, but not like A, in addition, punitive damages, being subjected to a very Draconian libertarian punishment theory.Now, consider the man on the street who knows no economics at all. He supports the minimum wage law, he votes for it, he urges others to do so. Why? Because he erroneously thinks that this law will actually raise the compensation of the poor and unskilled. The last thing on his mind is that it will create unemployment, or that fulfilling this law will unleash violence against those who disobey it. In my view, such a person is more akin to B, in my car story, than to A. I don’t think that people who vote for, support, etc., minimum wage laws are out and out criminals. They are just (invincibly) ignorant. This statement of Murray Rothbard’s is pertinent: “"It is no crime to be ignorant of economics, which is, after all, a specialized discipline and one that most people consider to be a 'dismal science.' But it is totally irresponsible to have a loud and vociferous opinion on economic subjects while remaining in this state of ignorance." So I ask, is the minimum wage supporter a criminal? I answer in the negative. Is such a person “irresponsible”? Yes, of course, he is. But irresponsibility is not a criminal offense.Every time I teach an introductory microeconomics course, I start off by taking a survey of my mainly freshman students. I offer them the following choices.1. The minimum wage level should be increased2. The minimum wage level should remain as is3. The minimum wage level should be decreased4. The minimum wage level should be eliminated5. The minimum wage level should be eliminated, and those responsible for implementing it should be imprisoned.
Note, I don't offer these kids any other option, such as, "unsure."
Here are the percentage responses I usually get.
- 95%2. 3%3. 0%4. 0%5. 2% (these are from students who enroll at Loyola because they came here to study with me and are already supporters of anarcho capitalism)Should 98% of my ignorant freshman students be considered criminals? I find it very difficult to agree with this assessment. But, note, I share this outlook regarding those who are responsible for implementing such unjust laws, such as congressmen who voted for it (watch out Bernie!), judges and cops who enforce it, etc.
Many times, when a social problem is closed to being solved or has a positive dynamic that signals that the end is near, it is usually when a great part of the population realizes the mere existence of the problem and organizes politically to end it. The great stories of poverty left by Charles Dickens (Oliver Twist) and Victor Hugo (Les Miserables) contrast with the substantial improvement of living standards of the population in the industrial age. As poverty was beginning to be reduced, the English Parliament started creating multiple commissions on poverty and laws to alleviate its effects. Something similar is happening nowadays with the third wave of feminism (the most hostile by far). Feminists are complaining about the problem of women inferiority in the same places where this problem has already been practically solved (Western Capitalist countries) and at a time when discrimination is minimum (today).
Furthermore, feminism is one of the new flags that those defeated with the fall of the Berlin Wall wave as their own. In many parts of the world, the feminist movement has been completely taken over by the old left. The proof of this is the increasingly clear application of Marxist sociology of class struggle to gender.
Third-wave feminism tries to link patriarchy with capitalism, and patriarchy with Western society. Let’s examine each one of these cases to see if there is any truth to these statements.
Capitalism and Patriarchy One of the relationships that the new feminism recurs to often is the association between capitalism and patriarchy. If this were true, we should expect capitalist countries to be the ones that oppress the female gender the most, either through discriminatory laws or restrictions of different kinds. To examine whether this is true, let’s look at how women’s situation differs depending on how capitalist a country is.
Source: Heritage Foundation. Georgetown Institute for Women, Peace and Security. The data presented is from 149 countries, each point is a country with its respective score in each index. The higher the Index of Economic Freedom, the higher the Women’s Welfare Index. It seems that as capitalism advances, so do women’s rights.
If we organize the countries into quartiles according to the most capitalist (first quartile) to the least capitalist (last quartile), we also see how the average score of the Women’s Welfare Index increases substantially the more capitalist a country is.
Source: Heritage Foundation. Georgetown Institute for Women, Peace and Security. As the data shows, the truth is everything contrary to what feminists try to explain. As capitalism advances, so does a woman’s situation. The Georgetown index used includes the most factors of possible discrimination against women—inclusion, justice, and security sub-indices.
In sum, when countries are more capitalist, the situation of social inclusion for women improves, discriminatory laws disappear, and women’s safety increases. It seems that the relationship between capitalism and patriarchy that is claimed by feminist groups does not occur in reality.
Western society and patriarchy Another of the great complaints of feminists is the alleged relationship between patriarchy and Western society. This is difficult to test, and there is also some controversy in trying to separate countries that have different civilizations. Language is an essential cultural vehicle. However, it is too narrow (we could easily say that Italians and Spaniards belong to the Western culture despite not having the same language). Another possible way to test this is by religion: we can say that Western culture is essentially of Judeo-Christian origin. But using religion as a criterion to determine if a country belongs to the West also comes with problems. For example, most of Africa is Christian, yet we could hardly place Africa as a Western civilization. In order to distinguish between Western civilizations and the rest, we will use the division that Huntington makes in his book The Clash of Civilizations and the Remaking of World Order (2011).
Huntington distinguishes 9 different civilizations. If we order countries by their type of civilization and calculate their average score in the women’s welfare index, we get the following graph:
Source: Huntington (2011). Georgetown Institute for Women, Peace and Security. The graph is cut below in the lowest score of the index and above in the highest score of the index. We can clearly see that Western civilization protects women’s rights the best. For a woman, being in a western country means a better situation in terms of social inclusion, not being subjected to discriminatory laws, and an increase in personal security. Western women enjoy the most rights in the world.
Of the 20 countries with the greatest welfare for women, 19 are Western countries (Singapore, a capitalist country par excellence, is the only non-Western country). The Muslim country with the greatest women welfare is the United Arab Emirates. It ranks 43 in the world, with an almost identical score to the second to last Western country on the list (Hungary). Of the 20 worst countries with the lowest welfare for women, 15 are Muslim and 5 are African.
Therefore, it seems clear that Western countries are the best place in the world to be a woman.
Conclusion Discrimination against women is a typical phenomenon of anti-capitalist and Muslim countries. The protection of women’s rights, in contrast, is a phenomenon that occurs in capitalist and Western countries.
The best solution to women’s discrimination is to adopt policies that are aimed at economic liberalization and to cultivate and protect Western values.
Originally published by UFM Market Trends
When I wrote about “crazy Bernie Sanders” in 2016, I wasn’t just engaging in literary hyperbole. The Vermont Senator is basically an unreconstructed leftist with a disturbing affinity for crackpot ideas and totalitarian regimes.
His campaign agenda that year was an orgy of new taxes and higher spending.
Though it’s worth noting that he’s at least crafty enough to steer clear of pure socialism. He wants massive increases in taxes, spending, and regulation, but even he doesn’t openly advocate government ownership of factories.
Then again, there probably wouldn’t be any factories to nationalize if Sanders was ever successful in saddling the nation with a Greek-sized public sector.
He’s already advocated a “Medicare-for-All” scheme with a 10-year price tag of $15 trillion, for instance. And now he has a new multi-trillion dollar proposal for guaranteed jobs.
In a column for the Washington Post, Robert Samuelson dissects Bernie’s latest vote-buying scheme. Here’s a description of what Senator Sanders apparently wants.
Sen. Bernie Sanders (I-Vt.) wants the federal government to guarantee a job for every American willing and able to work. The proposal sounds compassionate and enlightened, but in practice, it would almost certainly be a disaster. …Just precisely how Sanders’s scheme would work is unclear, because he hasn’t yet submitted detailed legislation. However, …a job-guarantee plan devised by economists at Bard College’s Levy Economics Institute…suggests how a job guarantee might function. …anyone needing a job could get one at a uniform wage of $15 an hour, plus health insurance (probably Medicare) and other benefits (importantly: child care). When fully deployed, the program would create 15 million public-service jobs, estimate the economists. …the federal government would pay the costs, the program would be administered by states, localities and nonprofit organizations.
As you might expect, the fiscal costs would be staggering (and, like most government programs, would wind up being even more expensive than advertised).
This would be huge: about five times the number of existing federal jobs (2.8 million) and triple the number of state government jobs (5 million). …The proposal would add to already swollen federal budget deficits. The Bard economists put the annual cost at about $400 billion. …overall spending is likely underestimated.
But the budgetary costs would just be the beginning.
Bernie’s scheme would basically destroy a big chunk of the job market since people in low-wage and entry-level jobs would seek to take advantage of the new government giveaway.
…uncovered workers might stage a political rebellion or switch from today’s low-paying private-sector jobs to the better-paid public-service jobs… The same logic applies to child-care subsidies.
And there are many other unanswered questions about how the plan would work.
Does the federal government have the managerial competence to oversee the creation of so many jobs? …Can the new workers be disciplined? …Finally, would state and local governments substitute federally funded jobs for existing jobs that are supported by local taxes?
If the plan ever got adopted, the only silver lining to the dark cloud is that it would provide additional evidence that government programs don’t work.
The irony is that, by assigning government tasks likely to fail, the advocates of activist government bring government into disrepute.
But that silver lining won’t matter much since a bigger chunk of the population will be hooked on the heroin of government dependency.
In other words, just as it’s now difficult to repeal Obamacare even though we know it doesn’t work, it also would be difficult to repeal make-work government jobs.
So we may have plenty of opportunity to mock Bernie Sanders, but he may wind up with the last laugh.
P.S. Regarding getting people into productive work, I figure the least destructive approach would be “job training” programs.
Beyond that, I’m not sure whether make-work government jobs are more harmful or basic income is more harmful.
Originally published at International Liberty
New home prices are rising in Las Vegas, with rising costs being blamed. Andrew and Dennis Smith write in the June edition of The Las Vegas Housing Letter, “Rising costs have been one of the key factors cited by home builders when it comes to rising home prices.”
Indeed, Trump-o-nomic theory has it that “trade wars are easy to win,” so each day seems to bring a tariff de jour or foreign retaliation. The political attack on Canadian softwood has lumber prices soaring and the Housing Letter calls attention to a possible shortage of domestic cement. For sure, skilled labor is in short supply and some subcontractors have just quit bidding projects in order to get caught up with the staff they have available.
So, do costs determine prices or do buyers? Many classical economists believed it was costs. As Robert Murphy explained in 2011, “the cost theory of value provided a coherent explanation for a genuine empirical regularity in a market economy. It really is the case that retail prices bear a strong correlation to the costs of production for various goods and services. The cost theory of value gave a plausible mechanism to explain this phenomenon.”
However, prospective new home buyers can walk out of model homes if they believe the asking price is too high. In a piece I wrote for mises.org , also in 2011, I made the point, “consumers in the Western world determine the prices — not by haggling — but by buying or not buying.”
For many months my desk was positioned in a corner of what my home building employer used as a sales office for a tract of homes he has under development a short distance away. In typical fashion, provided the market supports it, prices are increased as phases sell out. When customers asked why quoted prices in the future phases were higher than for the current phase under construction, the salesman would quickly offer “construction prices are going through the roof.”
Most home shoppers nodded their heads, maybe remembering their college economics class and the cost or labor theory of value. Of course, that statement is true, but, one day a customer replied,”That may be, but I think supply and demand are also at work.”
Indeed, as the father of the Austrian school of economics, Carl Menger, wrote in Principles of Economics ,
There is no necessary and direct connection between the value of a good and whether, or in what quantities, labor and other goods of higher order were applied to its production.… Whether a diamond was found accidentally or was obtained from a diamond pit with the employment of a thousand days of labor is completely irrelevant for its value.
My employer’s project is the only new development with homes for sale in a small town with local government growth restrictions. People want to live in this small city, and the locals don’t want any more neighbors. The number of existing homes for sale is few, thus, demand exceeds supply and prices can be increased; Trump tariffs or no Trump tariffs.
Not everyone who stops by purchases one of my employer’s cute little townhomes, and Menger explained why.
The measure of value is entirely subjective in nature, and for this reason a good can have great value to one economizing individual, little value to another, and no value at all to a third, depending upon the differences in their requirements and available amounts. What one person disdains or values lightly is appreciated by another, and what one person abandons is often picked up by another. While one economizing individual esteems equally a given amount of one good and a greater amount of another good, we frequently observe just the opposite evaluations with another economizing individual.
As Dr. Murphy explained, cost theory has things backward.
Here we see the methodological problem of the cost theory: By explaining final retail prices through the cost of making the goods, the cost theory implies that economic value is an objective property of physical items that flows from resources into the goods that they produce. In contrast, the subjective value theory of Menger and others starts with the valuation of consumer goods and works its way back through the prices of labor and other inputs accordingly.
Consumers decide what they will pay and determine value. Tariffs, the use of political force, determines where the buyer’s proceeds end up. Favored industries receive more and the entrepreneurs receive less, lowering their profits and making them less likely to take future risks in a similar political climate. As a real estate developer, the President should know better.
The assumption that the minimum wage helps low-wage workers permeates public discourse on the topic. One of the most curious political phenomenon is how the idea of the minimum wage is mindlessly accepted by the public as a policy that undoubtedly helps the poor. This transformation of the minimum wage from a policy originally intended to keep minorities out of the labor force to one aimed at protecting marginalized workers has been a stunning political magic trick.
How We Frame the Debate is Important Such confusion is partly caused by how minimum wage rhetoric frames the topic. Oftentimes people argue if businesses can afford to pay higher minimum wages to workers, if a law mandating a minimum wage is philosophically moral, or if increasing the minimum wage increases unemployment. However, we must be careful not to give the minimum wage credit for doing more than it is capable of. If an employer pays out $100 per hour in wages in total to their employees, then increasing the minimum wage from $10 to $13 per hour does not increase the total amount of wages paid to employees. It merely mandates that those $100 in wages be paid out in no less than $13 increments per employee. Thus, minimum wage laws can only change the distribution of wages paid out by employers, and, ironically, the change in the distribution is often in the direction of increased inequality between low-wage workers.
The Minimum Wage Only Addresses One Component of Salaries Annual salaries have three components: hourly wage, hours worked, and non-monetary benefits. A person’s annual salary is calculated by multiplying their hourly wage by the number of hours they worked and adding the value of their non-monetary benefits such as health insurance. The practical problem with the minimum wage is that it only addresses the hourly wage component of total annual salary. The minimum wage mandates that a person must make a certain amount of money per hour but says nothing about the total amount of money an employer must pay out to their employees in total. Any mandated increase in hourly wage can be offset by a decrease in number of hours worked and the value of non-monetary benefits.
Is it possible for any government policy addressing salary to help poor people? A government policy aimed at helping poor people via salary would have to force businesses to increase the total amount of money it pays its employees as a collective. Otherwise, the policy is merely shifting the distribution of that money amongst workers rather than the total amount of money paid to them. Since businesses can keep their labor costs at an equilibrium by adjusting wages, number of hours, and non-monetary compensation accordingly, such a government policy would have to address all three components. Thus, this would require forcing businesses to hire workers at a higher minimum wage, use a minimum number of total hours of labor, and provide a minimum value of non-monetary compensation.
What would that policy look like? Instead of just increasing the minimum wage, we would also hypothetically have a law requiring businesses to hire each worker for at least 40 hours per week and provide a minimum level of health benefits (or other non-monetary benefits). Such a law would ensure that each worker’s total annual salary would increase and that businesses could not get around the minimum wage by decreasing hours or benefits. Unfortunately, we run into yet another problem. These laws say nothing about how many employees a business must hire.
Mandating Higher Total Salaries Would Require Tyranny Thus, businesses could still get around paying out more money in total to their employees by hiring fewer workers. To address this, the government would have to engage in tyranny and pass an additional law mandating a minimum number of employees per business to ensure that the number of jobs available does not decrease. Yet, mandating that each company employ a certain number of workers would not guarantee a certain number of jobs available since the number of companies is still able to fluctuate.
Therefore, to truly mandate an increase in total salary paid out to low-wage workers in aggregate, the government would have to mandate a minimum hourly wage, number of hours, value of non-monetary benefits, number of employees, and number of businesses. Given that the two events are logically dependent on each other, the idea of the government mandating that a minimum number of businesses exist in the economy is as absurd as the idea that the minimum wage can increase the amount of money paid by employers to low-wage workers in total.
Businesses Do Have Fixed Labor Costs The caveat to the conclusions of this thought experiment is they assume businesses keep their labor costs approximately fixed. It is hypothetically possible for businesses to respond by raising prices. However, we should not be focused necessarily on increasing the absolute amount of dollars paid out to low-wage workers but rather increasing the purchasing power of their annual salaries. If a significant number of businesses respond to minimum wage increases by increasing prices, then the purchasing power of the salary of low-wage workers will be reduced by price increases, making minimum wage increases ineffective.
The other possibility is that businesses decrease their profit margins to accommodate larger labor costs. However, if this were actually how businesses responded to increased labor costs, then we would expect the total compensation of low-wage workers to increase as a result of minimum wage increases. However, a ground-breaking study on the minimum wage increase in Seattle from $11 to $13 showed that the average low-wage worker experienced a $1,500 decrease in annual income due to the minimum wage increase. Additionally, a review of the minimum wage literature in 2006 indicates that 85% of the most robust minimum wage studies found negative employment effects due to minimum wage increases. Furthermore, the 15% that found insignificant or positive employment effects only focused on the restaurant industry or used data from a short time-span. Using the restaurant industry as a proxy for low-wage workers was proven to bias the disemployment effects of minimum wage increases toward zero by the aforementioned study in Seattle.
Ultimately, we need to change the questions we ask about the minimum wage. We should stop asking if workers deserve a “living wage” and start asking if the minimum wage actually helps workers obtain one.
Being on a lifeboat does not sound like a pleasant experience. You’re hungry, baking under a hot sun, surrounded by sharks and endless miles of ocean, and the extent of your living space is maybe ten square feet. Being stuck on a lifeboat is not an ideal way to enjoy the ocean.
So given that being stuck on a lifeboat sucks so much, wouldn’t it be best if we just got rid of lifeboats? This is the logic of people who advocate shutting down sweatshops.
Working in a sweatshop is something I would like to avoid. Long, laborious hours in a hot factory for meager pay is not my top career choice. At the risk of making sweeping generalizations, nobody enjoys working in a sweatshop.
So why do people continue to do so?
If you look at the countries in which sweatshops exist, you don’t see a free market. You see the heavy hand of government intervening in the economy. These governments constrain trade, impede industry, and inhibit economic growth.
So the answer to why people continue to work in such deplorable conditions is pretty simple: they don’t have any other options.
Typical progressive compassion diagnoses a situation such as this, identifying the deplorable conditions of the sweatshop worker, and decides that the best thing one can do for them, when looking at all their available options, and then to remove the one they actually chose to do. From their moral pedestals, these activists proclaim that the children of these poor countries (countries implementing many of the very policies these activists lobby for) deserve an education, all while promoting regulations that serve to displace children into street thievery and prostitution.
This is what happened when Bangladesh passed their Child Labor Deterrence Bill in 1994. 50,000 Bangladeshi children lost their jobs, and the humanitarians broke open the champagne while these children took to even more dangerous work such as stone crushing and prostitution
Abolishing sweatshops is not the remedy to the dismal conditions of the citizens of poor countries. Removing the government from the economy would be, but even short of that, any reduction of trade regulations, taxation, and socialization will help foster an environment in which sweatshops are done away with naturally, through market competition and capital accumulation.
If you want people to have more access to education, food, and healthcare — among other first world amenities — then the best thing you can do for them is to support policies that allow for capital accumulation. Socialists hate this concept, but reality persists even in the face of Marxist bromides. An increase in capital means an increase in production, and an increase in production must precede an increase in consumption. You cannot have your cake and eat it too, and you certainly cannot eat your cake before you have it.
Abolishing sweatshops outright while continuing socialist policies does the opposite of increasing production. It essentially amounts to removing the lifeboat from the person stranded at sea.
Capitalists don’t deny that sweatshops are bad, at least relatively speaking. A modern white collar job is preferable to a sweatshop job. The capitalist simply acknowledges the reality that this kind of economy has to develop over time and, most importantly, under the right conditions: free market conditions.
Sweatshops are not the problem; they are a symptom of the problem. If you want to treat the true illness, instead of advocating the removal of sweatshops, focus on removing the government from the economy.
Can the entire story of the worst economic disaster in American history really be told from just eight words in a political party’s platform? In this case, yes.
Here are the fateful words that introduced the second section of the Republican Party's 1932 platform, right after a waffling plank on prohibition: “We believe in the principle of high wages.”
This was Herbert Hoover speaking. His most cherished economic belief was that wages could not be allowed to fall, and after the Crash of 1929 he vigorously jawboned business leaders to keep wages up. It was not just a question of persuasion. He made it clear that if businesses did not do as he demanded, legislative wage controls would swiftly follow. Business leaders were afraid to defy this edict, and did their best to keep wages where they had been.
The results were utterly disastrous. Since the prices of products and services were in a deflationary downward spiral, the most effective way to avoid bankruptcy would have been to cut wages and other costs. This had been done in the Depression of 1921 with impressive results. That depression, chronicled in an excellent history by Jim Grant, The Forgotten Depression, was over in a year and a half. Nor did workers in aggregate suffer from lower wages. Their lower wages bought the same amount of goods and services at reduced prices.
Confronted with rapidly falling prices following the Crash along with frozen wages, business owners resorted to the only expedient left: massive layoffs. It was their last resort and the only possible way to try to save their businesses. As a direct result of Hoover’s twisted logic, millions of workers were fired and immediately faced penury and even starvation, while those still employed, especially union members and government workers, enjoyed a windfall. Frozen wages with falling prices in effect doubled their real wages.
Murray Rothbard explained all this in America's Great Depression, but you won’t find it in high school history textbooks. Nor will you read that Franklin Roosevelt just doubled down on Hoover’s tragic policy mistake by enacting wage and price controls. In a celebrated incident, a poor tailor was sent to jail for charging a few too many pennies for pressing a pair of pants.
This was almost a century ago, but the public and politicians still fall for the same twisted illogic. In his 2014 state of the union address, President Obama said that “ I ask America’s business leader to raise your employees’ wages.” In her 2016 campaign, Hillary Clinton said the same thing: “It’s a pretty simple formula: higher wages lead to more demand, which leads to more jobs with higher wages….” Hillary did not explain why, given her premise, she was only asking for minor wage boosts. Why not mandate 100X higher wages? And while she was at it, why not also mandate 75% lower prices. The truth of course is that even modest wage and price controls hamper the free price system and sooner or later lead to unemployment and misery for those least able to protect themselves, the poor and the middle class.
The Democratic Party platform of 1932 also makes for interesting reading. It describes itself as a “covenant” and a “contract" with the American people, claims that voters can rely on its candidate to follow the promised policies, and includes among those policies an elimination of expanding and contracting credit “ for private profit,” a sound dollar, a cut of federal expenditure of no less than 25% together with a balanced budget, and elimination of government activities that could be handled by private enterprise and of subsidies to private interests. This “ contract” was of course immediately jettisoned by FDR.
"We can’t welcome all the misery of the world but we must take our share." This is a maxim whose popularity speaks volumes about our apprehension over poverty and immigration.
This seemingly benevolent vocabulary, however, limits debate. It insists that generous people will welcome more demands on the taxpayer's pocketbooks. The immigrant must be welcomed, they are told. The natives have an obligation of care, which means more and more subsidies in a country where they are also being told to tighten their belts.
But forced solidarity with all of humanity breeds resentment, and supporters of this view forget that solidarity with others flourishes only in the context of elective affinities. That is why the Austrian economist Friedrich Hayek said that, while he was an internationalist in theory, socialism was driving him to become a nationalist in practice.
The "State medical assistance," mainly directed at illegal aliens, is indicative of this trend. Although the total cost does not exceed 1% of the budget of the State, it serves to increase frustration with migrants and the state’s profligacy.
Indeed, an abundant academic literature suggests the existence of a causality between the generosity of social systems and the mistrust of natives toward immigrants. It is therefore not surprising to see the emergence of a movement toward solidarity among natives. Government-imposed charity only works with benefactors who identify with its beneficiaries.
Blaming Europeans for Poverty in the Developing World Altruistic moralizing is therefore the best way to arouse feelings of bitterness among locals. It leads to assimilate foreigners to a horde of parasites whose fate will be to live off the sweat of the “host” society. The exasperation is all the greater as the injunction made to the Europeans to sacrifice themselves is accompanied by a supposed guilt for the poverty of the third world. The setbacks of Africans continue to be blamed on the colonial past and the opulence of the West. The descendants of settlers are called to account for acts they did not commit. Conversely, the responsibility of the African political elite is ignored while their corruption is the main obstacle to the development of the continent.
You do not have to be an expert in development economics to see the absence of a correlation between the colonial past, poverty, and prosperity. In the 1960s, the per capita GDP of South Korea and that of most countries in sub-Saharan Africa were comparable. But in this case, only Korea has established stable institutions that are compatible with the development of a market economy. Similarly, some of the most prosperous places in the world include former colonies such as Hong Kong and Singapore, whose wealth sometimes surpasses that of the former European colonial powers. These successes, however, are ignored by Third Worlders. They contravene the victimization story to which the former colonies are assigned. They also deny the myth of the Western monopoly of opulence that feeds post-colonial resentment, itself tinged with anti-capitalism.
In spite of the assignment to misery and dependence, there is the promise of development through trade. This path is nevertheless ignored by the political class, for whom the salvation of foreign populations resides in assistance. On the external scene, despite its failures, development aid remains the only horizon of the fight against poverty in the South.
Even African leaders no longer adhere to these solutions, as evidenced by their proposed free trade area. 44 of the 55 member states of the African Union signed an agreement in Kigali on 21 March 2018, to reduce the barriers to trade on the continent.
Limiting the Ability to Work Western states — including France and Italy — who make the mistake of “welcoming” refugees by denying them the right to work and trade could therefore be inspired by this philosophy. They would promote their social integration, ease the pressure on public finances and abolish the logic of paternalistic repentance that tarnishes the image of these populations whose thirst for entrepreneurship is yet unmatched. Refugees are indeed the first to apply the famous slogan “Trade, not help!” As long as they are allowed to work.
The work of Alexander Betts and Paul Collier, economists at Oxford University, for example, show that refugees prefer to flee UN-run shelters to work in the informal economy as soon as opportunity presents itself in the countries where they are hosted. When they are allowed to work, as in Uganda, they open businesses and employ indigenous people. It is therefore only up to Europeans to reveal the richness concealed by the apparent misfortune of these industrious populations.
This article originally appeared in French at Le Figaro.
The most robust study ever conducted on the topic found that the average California state government worker earned 23 percent more in total compensation than their similarly skilled and educated private-sector counterpart.
That value rose to 33 percent above their private-sector counterpart, when the value of California state government workers’ legendary job security was included. But a recent report by the California State Auditor leaves one with the impression that the study vastly underestimated the true value of job security for government workers.
In February of 2014, a DMV employee was documented by her supervisors for sleeping at work. According to four separate witnesses, the employee continued to sleep at her desk for a minimum of three hours a day, for nearly 4 years straight.
The most mind-boggling part of this story is that there is no dispute that this employee was sleeping on the job, every day, for nearly 4 years.
In addition to the four witnesses, her daily sleeping was also documented by her supervisors in written, periodic performance evaluations, which the employee signed off on without disputing any of the factual allegations contained within.
When the state auditor got involved midway through 2017, the employee’s supervisor defended her failure to perform her core duty by claiming that “because she woke up the employee three to four times each day, she believed the employee missed only 20 to 30 minutes of work time daily.”
The auditor rejected the obvious falsehood that an employee who needed to be woken up “three to four times each day” somehow missed only 20 to 30 minutes of work.
The auditor instead found that the employee slept for at least 3 hours a day from February 2014 through December 2017 — a finding consistent with the statements provided by four separate witnesses and the fact that the employee’s work output was only 35 percent of the amount expected.
That 35 percent figure just reflects the number of reports the employee turned in, compared to what was expected. If we’re measuring productivity or value, it’s possible the employee was actually a net negative to the department, given what her colleagues and supervisors had to say about the few reports she did turn in:
Further, the employee’s evaluations mention that she made mistakes when entering data. In fact, during the investigation, a witness explained that the employee’s work was often so inaccurate that the witness would not trust the employee to accurately enter the witness’s own address or vehicle ownership change. Thus, the employee’s behavior may have prevented DMV from providing the public with an appropriate level of service.
So what was the final outcome? Despite sleeping on the job everyday and producing error-filled work for 4 years, the employee received no disciplinary action of any kind, and continues to collect her full salary and benefits.
What’s much worse, in my opinion, is the gross negligence of the supervisor. The DMV is a large employer. There will be some bad apples. Moreover, if an employee who is sleeping at their desk everyday receives no penalty of any kind, it’s not terribly surprising they never change their own behavior.
So what happened to the DMV supervisor who, by her own admission, did not take any disciplinary action against an employee that she needed to wake up three to four times a day, every day, for 4 years?
Nothing.
While the auditor recommended that the DMV take disciplinary action against the supervisors, the DMV countered that because they had no prior issues, they would instead only require that the supervisors undergo training to ensure they understand that employees who sleep on the job every day for four years should be disciplined, should such a situation arise in the future.
And that is why so many are critical of government. It’s not because this story is reflective of government employees generally — it’s not. The audit only occurred because of the employee’s coworkers who blew the whistle.
The continually justified criticism of government, however, is that it is a grossly negligent and irresponsible steward of taxpayer dollars — something perfectly reflected in the DMV’s response to the auditor’s findings.
Originally published by Transparent California.
Are cracks emerging in the Swedish welfare state?
Leftist experts routinely praise the country for its generous welfare state, and cast shame on countries in the Anglo sphere, such as the United States, for not adopting Nordic style welfare systems.
Although Scandinavian countries feature sizeable welfare states, they are far from socialist. However, the presence of welfare mechanisms in an economy can still be problematic.
At the moment, Sweden is experiencing trouble in assimilating its immigrant population. Recent reports reveal a rising number of violent crimes in immigrant suburbs. Although Sweden’s overall crime rates are low, the country is experiencing increasing levels of gang violence and shootings, and the emergence of immigrant ghettoes.
This is not exclusive to Sweden, as other European countries like France, have had numerous issues with immigrant assimilation. Such troubles from new arrivals has spurred a populist uprising across Europe, with Sweden joining in the mix. In Sweden, the Sweden Democrats, an anti-immigration party, has gained steam campaigning on immigration.
The topic of immigration is nuanced, and both sides of the debate (closed vs. open borders) raise valid concerns. But there might be something more to this immigration assimilation conundrum than meets the eye.
Sweden Is not so Exceptional Sweden’s vaunted welfare state could be the very culprit behind the recent wave of immigrant unrest. Since the publication of Nina Sanandaji’s Scandinavian Unexceptionalism, a growing number of intellectuals have started to remove the magical aura of the Scandinavian welfare model.
Scandinavian Unexceptionalism sheds light, however, on one overlooked development — immigration and assimilation. Sanandaji argues that the welfare state has impaired immigrants' when it comes to integrating into, and contributing to, the Swedish economy.
Providing a balanced approach to the topic, Sanandaji offers a positive portrayal of immigration trends in the mid-twentieth century, highlighting how “the rate of employment for foreign-born residents was 20 per cent higher than that for the average citizen” in 1950s.
But as Sweden’s welfare state grew and its labor policies tightened, Sweden’s once rosy immigration story started to produce several worrisome trends, which Sanandaji covers in detail:
By 2000, however, the rate of employment was 30 per cent lower for the foreign-born residents. Another comparison shows that, in 1968, foreign-born individuals had 22 per cent higher income from work compared with those born in Sweden. In 1999, the average income of foreign-born residents was 45 per cent lower than that of those born in Sweden.Sanandaji, p. 90.
Middle Eastern immigrants, in particular, have bared the brunt of this integration dilemma.
Since the 1970s, Sweden has attracted immigrants from Middle Eastern countries such as Iraq, Iran, and Turkey — the author of Scandinavian Unexceptionialism himself is a Swede of Iranian origin. Initially, these immigrants were able to assimilate without issue.
However, in present times, Middle Eastern immigrants in Sweden are not reaping the same benefits as their counterparts in more labor-friendly countries such as the United States. Sanandaji’s shares how Iranian and Turkish immigrants’ work income stacks up against native Swedes:
Between 1993 and 2000, the income from work for the average Iranian immigrant was only 61 per cent, and for the average Turkish immigrant 74 per cent, of the average income of a native Swede.Sanandaji, p. 91.
In contrast, Iranian and Turkish immigrants to the United States have fared better:
According to the US Census for 2000, those born in Iran had an income that was 136 per cent of the average for native-born US residents. Those born in Turkey had an income of 114 per cent of the average for native-born residents.Sanandaji, p. 91.
Sanandaji concedes that differences exist between Iranian and Turkish migrants to the United States and those who migrated to Sweden. Nevertheless, Sanandaji contends that the differences alone cannot explain the huge gap in economic outcomes between the immigrant groups, since “many of those who left for Sweden had belonged to the Turkish or Iranian middle classes.”
Coming to Grips with the Toxicity of the Welfare State So there may be overlooked institutional factors at play when analyzing Sweden’s immigrant dilemma. This is part of a systemic problem sweeping across Europe since bureaucratic entities like the European Commission have sponsored generous refugee programs.
These programs’ perverse incentives have created a form of “asylum shopping” where refugees bounce from one country that grants them asylum to another one with more generous welfare benefits.
A more sensible solution to this problem would be for private organizations to sponsor immigrants and refugees without having the state involved in any form of welfare provision. Ideally, there would be free movement of people to whichever location aligns with their interests.
But due to the welfare state creating distortions and questionable incentives, an open border system, as currently constructed, would not send out accurate market signals of economic opportunity.
It may be time for mainstream pundits to admit that the Nordic model of generous welfare states comes with significant costs. Although Nordic countries still enjoy high levels of economic freedom, their creeping levels of welfare socialism can still present problems.
Government’s natural tendency to grow and the presence of welfare states allow for politicians to buy votes and pursue myopic policies for the sake of political expediency. But like all government intervention, welfare policies comes with a cost — both economically and socially.
Recognizing this uncomfortable truth will bring us closer to understanding that free markets are the solution to the current problems. Flirting with another variant of statism — social democracy in this case — needs to be completely discarded just like other statist systems that have come before it.
The jobless claims figures of the past two weeks have been unprecedented and alarming. However, knowing that the data will continue to be concerning, we need to analyze how quickly the economy can can heal and go back to the previous path of record job creation.
The United States economy starts from a comparatively stronger base. Unemployment reached a five-decade low in February, and, despite the extremely weak March jobs figure, it stood at 4.4 percent in the first week of April. This compares to a 7.3 percent unemployment figure in the euro area and 6.5 percent in the European Union. In countries such as Spain and Greece, unemployment stood at 13 and 16 percent, respectively.
The underemployment figure is also significantly better in the United States. The unadjusted U-6 unemployment rate was 8.9 percent in March. Comparable underemployment in the European Union is at an estimated 15 percent, and 12 percent in the eurozone, according to Eurostat figures.
The expected rise in unemployment from the forced shutdown of major economies due to COVID-19 containment measures is simply staggering. The International Labor Organization reported that potential job losses worldwide could amount to 36 million. Unfortunately, this figure may be underestimated.
The figure of unemployed in the second quarter of 2020 in the United States could rise to 52 million, a 32 percent unemployment rate, according to the Federal Reserve Bank of St. Louis. In Spain alone, the figure could rise by 5 million, an unemployment rate of 35 percent in our estimates, while temporary and full unemployed could rise to 57 million in the European Union.
The key to a strong recovery lies in the dynamism of the labor market and the strength of the business fabric, but also in a diversified and open mechanism of financing of the real economy.
The United States could recover one month's job losses within one to three months. In the eurozone, this would take a minimum of five to six months, particularly in Germany, which also started the shutdown crisis with an all-time low unemployment rate of 3.2 percent. For countries with higher labor market rigidity, such as Greece, Spain, and Italy, this recovery could take between fourteen months and two years.
The key to recovering jobs quickly and efficiently is the combination of a flexible labor market, an attractive investment framework, and solid policies that preserve the business fabric of the country. These are the main reasons why the United States has traditionally reduced unemployment faster and with better wage growth than the eurozone.
There’s also the issue of disincentives. In the eurozone, excessive intervention in the labor and business environment adds to many entitlement programs that may be counterproductive in a recovery. The European Union spends about 1 percent of GDP per year in “active employment programs” and subsidies, yet the unemployment rate is almost double that of leading economies.
Excessive regulation works as a barrier to investment and job creation in growth times and generates negative incentives to recover after crisis periods. This was evident during the last crisis. The European Union delayed its recovery by four years due to the increased intervention and regulatory hurdles.
The financing mechanism is also key. In the United States, the real economy relies less on bank financing than in most of Europe. The real economy's dependence on bank financing in the European Union is close to 80 percent, according to the European Central Bank, compared to 17 percent in the United States, according to the Federal Reserve Board.
This dynamism and openness in financing business opportunities has traditionally helped the United States boost its economic recovery from a recession, achieving faster growth and more job creation than its peers.
An attractive taxation system is essential to recovering quickly. Unfortunately, in the European Union governments tend to raise taxes on businesses and capital in recession periods, which significantly hurts the recovery process. Legal and investment security are also fundamental in a sustainable and rapid recovery, and, unfortunately, interventionist messages coming from governments generate less inflow of foreign investment and lower growth in gross capital formation.
The recent decision of the Italian and Spanish governments to make dismissals forbidden by law and to intervene in prices will likely prove ineffective, as unemployment will soar anyway due to the destruction of businesses forced to close and will likely harm future investment inflows.
Shutting down the economy may cause long-lasting damage to job creation and businesses that can’t be unwound in a few months; that’s why it’s essential to contain the virus spread with effective measures, but we can’t forget that each month of lockdown means millions of unemployed and thousands of business closures.
The best course of action to tackle the health crisis, as well as the economic collapse risk, is to follow the South Korea and Singapore strategy, which is to implement strict prevention and testing measures, preserve the business fabric, provide safety equipment and health protocols for businesses to survive, and ensure that the economy continues to work while controlling the health crisis.
We can’t forget the difficult time that millions of workers and thousands of businesses are going through, and that’s why it’s imperative for governments to preserve the business fabric to avoid an economic depression of long-lasting social consequences.
Originally published by The Epoch Times.
[Ludwig von Mises, Planning for Freedom and Sixteen Other Essays and Addresses (1952); included in chapter 14 of The Mises Reader Unabridged, edited by Shawn Ritenour.]
Our economic system — the market economy or capitalism — is a system of consumers' supremacy. The customer is sovereign; he is, says a popular slogan, "always right." Businessmen are under the necessity of turning out what the consumers ask for and they must sell their wares at prices which the consumers can afford and are prepared to pay. A business operation is a manifest failure if the proceeds from the sales do not reimburse the businessman for all he has expended in producing the article. Thus the consumers in buying at a definite price determine also the height of the wages that are paid to all those engaged in the industries.
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Wages Ultimately Paid By the Consumers It follows that an employer cannot pay more to an employee than the equivalent of the value the latter's work, according to the judgment of the buying public, adds to the merchandise. (This is the reason why the movie star gets much more than the charwoman.) If he were to pay more, he would not recover his outlays from the purchasers; he would suffer losses and would finally go bankrupt. In paying wages, the employer acts as a mandatory of the consumers, as it were. It is upon the consumers that the incidence of the wage payments falls. As the immense majority of the goods produced are bought and consumed by people who are themselves receiving wages and salaries, it is obvious that in spending their earnings the wage earners and employees themselves are foremost in determining the height of the compensation they will get.
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What Makes Wages Rise? The buyers do not pay for the toil and trouble the worker took nor for the length of time he spent in working. They pay for the products. The better the tools are which the worker uses in his job, the more he can perform in an hour, the higher is, consequently, his remuneration. What makes wages rise and renders the material conditions of the wage earners more satisfactory is improvement in the technological equipment. American wages are higher than wages in other countries because the capital invested per head of the worker is greater and the plants are thereby in the position to use the most efficient tools and machines. What is called the American way of life is the result of the fact that the United States has put fewer obstacles in the way of saving and capital accumulation than other nations. The economic backwardness of such countries as India consists precisely in the fact that their policies hinder both the accumulation of domestic capital and the investment of foreign capital. As the capital required is lacking, the Indian enterprises are prevented from employing sufficient quantities of modern equipment, are therefore producing much less per man-hour, and can only afford to pay wage rates which, compared with American wage rates, appear as shockingly low.
There is only one way that leads to an improvement of the standard of living for the wage-earning masses, viz., the increase in the amount of capital invested. All other methods, however popular they may be, are not only futile, but are actually detrimental to the well-being of those they allegedly want to benefit.
- What Causes Unemployment The fundamental question is: is it possible to raise wage rates for all those eager to find jobs above the height they would have attained on an unhampered labor market?
Public opinion believes that the improvement in the conditions of the wage earners is an achievement of the unions and of various legislative measures. It gives to unionism and to legislation credit for the rise in wage rates, the shortening of hours of work, the disappearance of child labor, and many other changes. The prevalence of this belief made unionism popular and is responsible for the trend in labor legislation of the last two decades. As people think that they owe to unionism their high standard of living, they condone violence, coercion, and intimidation on the part of unionized labor and are indifferent to the curtailment of personal freedom inherent in the union-shop and closed-shop clauses. As long as these fallacies prevail upon the minds of the voters, it is vain to expect a resolute departure from the policies that are mistakenly called progressive.
Yet this popular doctrine misconstrues every aspect of economic reality. The height of wage rates at which all those eager to get jobs can be employed depends on the marginal productivity of labor. The more capital — other things being equal — is invested, the higher wages climb on the free labor market, i.e., on the labor market not manipulated by the government and the unions. At these market wage rates all those eager to employ workers can hire as many as they want. At these market wage rates all those who want to be employed can get a job. There prevails on a free labor market a tendency toward full employment. In fact, the policy of letting the free market determine the height of wage rates is the only reasonable and successful full-employment policy. If wage rates, either by union pressure and compulsion or by government decree, are raised above this height, lasting unemployment of a part of the potential labor force develops.
- Credit Expansion No Substitute for Capital These opinions are passionately rejected by the union bosses and their followers among politicians and the self-styled intellectuals. The panacea they recommend to fight unemployment is credit expansion and inflation, euphemistically called “an easy money policy.”
As has been pointed out above, an addition to the available stock of capital previously accumulated makes a further improvement of the industries’ technological equipment possible, thus raises the marginal productivity of labor and consequently also wage rates. But credit expansion, whether it is effected by issuing additional banknotes or by granting additional credits on bank accounts subject to check, does not add anything to the nation’s wealth of capital goods. It merely creates the illusion of an increase in the amount of funds available for an expansion of production. Because they can obtain cheaper credit, people erroneously believe that the country’s wealth has thereby been increased and that therefore certain projects that could not be executed before are now feasible. The inauguration of these projects enhances the demand for labor and for raw materials and makes wage rates and commodity prices rise. An artificial boom is kindled.
Under the conditions of this boom, nominal wage rates which before the credit expansion were too high for the state of the market and therefore created unemployment of a part of the potential labor force are no longer too high and the unemployed can get jobs again. However, this happens only because under the changed monetary and credit conditions prices are rising or, what is the same expressed in other words, the purchasing power of the monetary unit drops. Then the same amount of nominal wages, i.e., wage rates expressed in terms of money, means less in real wages, i.e., in terms of commodities that can be bought by the monetary unit. Inflation can cure unemployment only by curtailing the wage earner’s real wages. But then the unions ask for a new increase in wages in order to keep pace with the rising cost of living and we are back where we were before, i.e., in a situation in which large-scale unemployment can only be prevented by a further expansion of credit.
This is what happened in this country as well as in many other countries in the last years. The unions, supported by the government, forced the enterprises to agree to wage rates that went beyond the potential market rates, i.e., the rates which the public was prepared to refund to the employers in purchasing their products. This would have inevitably resulted in rising unemployment figures. But the government policies tried to prevent the emergence of serious unemployment by credit expansion, i.e., inflation. The outcome was rising prices, renewed demands for higher wages and reiterated credit expansion; in short, protracted inflation.
- Inflation Cannot Go On Endlessly But finally the authorities become frightened. They know that inflation cannot go on endlessly. If one does not stop in time the pernicious policy of increasing the quantity of money and fiduciary media, the nation’s currency system collapses entirely. The monetary unit’s purchasing power sinks to a point which for all practical purposes is not better than zero. This happened again and again, in this country with the Continental Currency in 1781, in France in 1796, in Germany in 1923. It is never too early for a nation to realize that inflation cannot be considered as a way of life and that it is imperative to return to sound monetary policies. In recognition of these facts the administration and the Federal Reserve authorities some time ago discontinued the policy of progressive credit expansion.
It is not the task of this short article to deal with all the consequences which the termination of inflationary measures brings about. We have only to establish the fact that the return to monetary stability does not generate a crisis. It only brings to light the malinvestments and other mistakes that were made under the hallucination of the illusory prosperity created by the easy money. People become aware of the faults committed and, no longer blinded by the phantom of cheap credit, begin to readjust their activities to the real state of the supply of material factors of production. It is this — certainly painful, but unavoidable — readjustment that constitutes the depression.
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The Policy Of The Unions One of the unpleasant features of this process of discarding chimeras and returning to a sober estimate of reality concerns the height of wage rates. Under the impact of the progressive inflationary policy the union bureaucracy acquired the habit of asking at regular intervals for wage raises, and business, after some sham resistance, yielded. As a result these rates were at the moment too high for the state of the market and would have brought about a conspicuous amount of unemployment. But the ceaselessly progressive inflation very soon caught up with them. Then the unions asked again for new raises and so on.
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The Purchasing Power Argument It does not matter what kind of justification the unions and their henchmen advance in favor of their claims. The unavoidable effects of forcing the employers to remunerate work done at higher rates than those the consumers are willing to restore to them in buying the products are always the same: rising unemployment figures.
At the present juncture the unions try to take up the old, a hundred times refuted purchasing power fable. They declare that putting more money into the hands of the wage earners — by raising wage rates, by increasing the benefits to the unemployed and by embarking upon new public works — would enable the workers to spend more and thereby stimulate business and lead the economy out of the recession into prosperity. This is the spurious pro-inflation argument to make all people happy through printing paper bills. Of course, if the quantity of the circulating media is increased, those into whose pockets the new fictitious wealth comes — whether they are workers or farmers or any other kind of people — will increase their spending. But it is precisely this increase in spending that inevitably brings about a general tendency of all prices to rise or, what is the same expressed in a different way, a drop in the monetary unit’s purchasing power. Thus the help that an inflationary action could give to the wage earners is only of a short duration. To perpetuate it, one would have to resort again and again to new inflationary measures. It is clear that this leads to disaster.
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Wage Raises As Such Not Inflationary There is a lot of nonsense said about these things. Some people assert that wage raises are “inflationary.” But they are not in themselves inflationary. Nothing is inflationary except inflation, i.e., an increase in the quantity of money in circulation and credit subject to check (check-book money). And under present conditions nobody but the government can bring an inflation into being. What the unions can generate by forcing the employers to accept wage rates higher than the potential market rates is not inflation and not higher commodity prices, but unemployment of a part of the people anxious to get a job. Inflation is a policy to which the government resorts in order to prevent the large-scale unemployment the unions’ wage raising would otherwise bring about.
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The Dilemma of Present-Day Policies The dilemma which this country — and no less many other countries — has to face is very serious. The extremely popular method of raising wage rates above the height the unhampered labor market would have established would produce catastrophic mass unemployment if inflationary credit expansion were not to rescue it. But inflation has not only very pernicious social effects. It cannot go on endlessly without resulting in the complete breakdown of the whole monetary system.
Public opinion, entirely under the sway of the fallacious labor union doctrines, sympathizes more or less with the union bosses’ demand for a considerable rise in wage rates. As conditions are today, the unions have the power to make the employers submit to their dictates. They can call strikes and, without being restrained by the authorities, resort with impunity to violence against those willing to work. They are aware of the fact that the enhancement of wage rates will increase the number of jobless. The only remedy they suggest is more ample funds for unemployment compensation and a more ample supply of credit, i.e., inflation. The government, meekly yielding to a misguided public opinion and worried about the outcome of the impending election campaign, has unfortunately already begun to reverse its attempts to return to a sound monetary policy. Thus we are again committed to the pernicious methods of meddling with the supply of money. We are going on with the inflation that with accelerated speed makes the purchasing power of the dollar shrink. Where will it end? This is the question which Mr. Reuther and all the rest never ask.
Only stupendous ignorance can call the policies adopted by the self-styled progressives “pro-labor” policies. The wage earner like every other citizen is firmly interested in the preservation of the dollar’s purchasing power. If, thanks to his union, his weekly earnings are raised above the market rate, he must very soon discover that the upward movement in prices not only deprives him of the advantages he expected, but besides makes the value of his savings, of his insurance policy and of his pension rights dwindle. And, still worse, he may lose his job and will not find another.
- Insincerity In The Fight Against Inflation All political parties and pressure groups protest that they are opposed to inflation. But what they really mean is that they do not like the unavoidable consequences of inflation, viz., the rise in living costs. Actually they favor all policies that necessarily bring about an increase in the quantity of the circulating media. They ask not only for an easy money policy to make the unions’ endless wage boosting possible but also for more government spending and — at the same time — for tax abatement through raising the exemptions.
Duped by the spurious Marxian concept of irreconcilable conflicts between the interests of the social classes, people assume that the interests of the propertied classes alone are opposed to the unions’ demand for higher wage rates. In fact, the wage earners are no less interested in a return to sound money than any other group or class. A lot has been said in the last months about the harm fraudulent officers have inflicted upon the union membership. But the havoc done to the workers by the unions’ excessive wage boosting is much more detrimental.
It would be an exaggeration to contend that the tactics of the unions are the sole threat to monetary stability and to a reasonable economic policy. Organized wage earners are not the only pressure group whose claims menace today the stability of our monetary system. But they are the most powerful and most influential of these groups and the primary responsibility rests with them.
- The Importance of Sound Monetary Policies Capitalism has improved the standard of living of the wage earners to an unprecedented extent. The average American family enjoys today amenities of which, only a hundred years ago, not even the richest nabobs dreamed. All this well-being is conditioned by the increase in savings and capital accumulated; without these funds that enable business to make practical use of scientific and technological progress the American worker would not produce more and better things per hour of work than the Asiatic coolies, would not earn more and would, like them, wretchedly live on the verge of starvation. All measures which — like our income and corporation tax system — aim at preventing further capital accumulation or even at capital decumulation are therefore virtually anti-labor and anti-social.
One further observation must still be made about this matter of saving and capital formation. The improvement of well-being brought about by capitalism made it possible for the common man to save and thus to become in a modest way himself a capitalist. A considerable part of the capital working in American business is the counterpart of the savings of the masses. Millions of wage earners own saving deposits, bonds and insurance policies. All these claims are payable in dollars and their worth depends on the soundness of the nation’s money. To preserve the dollar’s purchasing power is also from this point of view a vital interest of the masses. In order to attain this end, it is not enough to print upon the bank notes the noble maxim In God We Trust. One must adopt an appropriate policy.
The Canadian Hockey League (CHL), which consists of the Ontario Hockey League (OHL), the Western Hockey League (WHL), and the Quebec Major Junior Hockey League (QMJHL), is currently embroiled in a “$180-million class-action lawsuit. The suit on behalf of all current and many former players seeks outstanding wages, overtime pay, holiday pay and vacation pay.”
There are 60 teams in the CHL (including 8 in the US). Players are 16 to 20 years old. This is the primary development league for the NHL. Equipment, billeting, and travel costs are paid by the team, and for each season he plays in the league, the league pays for one year of post secondary education (tuition, books, compulsory fees) for the player.
With games, practices, and travel, these young players ‘work’ a considerable amount of time each week, for which they receive a stipend which is far below the minimum wage dictated by the government in each jurisdiction. Thus, the lawsuit. The players say the CHL is in breach of employment standards legislation.
The players should be careful what they wish for and consider two important questions.
First question: Is a government legislated minimum wage a good idea?
Second question: Why are you suing, given that the teams have complied with the terms of the contract which each of you voluntarily signed?
Minimum Wage Legislation Employers are treating workers unfairly! Living standards are low! We must help the workers! This is the propaganda of politicians supporting the minimum wage. They love minimum wage legislation because workers outnumber employers by a significant margin, which means it is an easy way to buy votes, regardless of the consequences.
Most economists who have no connection with the government agree that a legally mandated minimum wage reduces employment. Example: an employer estimates an inexperienced unskilled worker will add value to his company equal to $8.00 per hour. This person will NOT be hired if the government mandated minimum wage is $8.00 or higher, because the employer would lose money. Thus, the government discriminates against inexperienced unskilled workers by ‘legally’ denying them an opportunity to gain experience and develop skills to enhance their future economic prospects. We complain about teenagers having too much time on their hands. Why aren’t more of them working, we ask. Now you know.
Jacob G. Hornberger, former trial attorney and professor of law and economics, wrote: “Perhaps the best manifestation of the economic horror that the minimum wage inflicts on people is with respect to black teenagers.” Why? Because minimum wage laws removed an economic weapon from the hands of black people.
When the government’s minimum wage was either non-existent or set at a rate not substantially higher than the market rate, many employers were racist, but nevertheless hired black people who offered to work for lower pay than white people. Result: employment was higher among black teens than white teens. As economics professor Walter Williams wrote, “in 1948, black teen unemployment was less than white teen unemployment, and black teens were more active in the labor market. Today black teen unemployment is about 40 percent; for whites, it is about 20 percent.”
Discrimination in the private sector pales in comparison to the massive discriminatory effects of the government’s minimum wage laws.
Understanding Basic Principles This brings us to the Ontario government’s response to OHL commissioner David Branch’s request to confirm players’ amateur status, thereby excluding players from employment standards legislation, which would presumably strengthen the league’s defence against the lawsuit. The government gave Branch what he wanted, thus replicating the response from governments in other jurisdictions.
Hockey commentator Don Cherry said if the lawsuit is successful, 75% of junior owners will fold their teams. Whether this is true or not, teams’ costs will rise substantially if players are paid the minimum wage instead of receiving scholarships. So, when the Ontario government says it is "protecting the long-term sustainability of local junior hockey teams," it is acknowledging that minimum wage legislation raises costs for employers, which in turn creates unemployment.
Politicians say they support minimum wage legislation because it helps workers, but they do not stand firm on this principle, misguided as it is. A principle, by definition, is not open to compromise, but politicians make exceptions when it is politically expedient. If this lawsuit teaches us anything, it is that politicians have no principles.
The players also have something to learn about principles. The stipend they receive is clearly stipulated in the contract each of them voluntarily signed with their teams. A contract is supposed to mean something. It reflects the commitments made by all parties to the contract, and to keep one’s word is an important principle to live by.
Future junior players should decline to sign contracts if they don’t like the terms. This is a good tactic if they believe teams are sufficiently profitable to pay them the minimum wage (or more). But if their demands are not met, they still have the option of signing for lower pay. The important point is that players are currently free to exercise this option, an option which the government forcibly denies to workers in other industries.
When we use the force of government to get what we want, there is usually a high price to pay, but we fail to connect the dots. If they win their lawsuit, many players could lose their jobs when teams are forced to pay minimum wages they cannot afford. For decades, this has been the economic reality for workers in other industries.
Courts are supposed to enforce contracts, not overrule them. If we can appeal to government courts whenever we decide we don’t like the terms of a contract, the inevitable outcome is (and has been) an erosion of societal trust and economic prosperity because fewer contracts are consummated.
The players can seize the moral high ground by honouring their contracts and instructing their lawyers to drop the lawsuit. Then they might teach politicians what it means to stand on principle.
As candidates begin to put their names in the hat for the presidential race, one candidate is running almost solely on one issue. Andrew Yang, a former lawyer and entrepreneur, wants Universal Basic Income to be implemented for all 18-64 year-olds. His argument for this, per his website, is “a third of all working Americans will lose their job to automation in the next 12 years. Our current policies are not equipped to handle this crisis.”
Will Technology Cause An Unemployment Crisis? Yang joins a growing list of vocal supporters who insist technology advancements will result in massive unemployment, and therefore UBI is necessary for society. This is not a new idea. The idea that technology destroys jobs and will cause massive unemployment prevails despite history demonstrating otherwise. It’s a disproven myth. After all, if technology had been destroying jobs for the hundreds of years people have been arguing about automation and machines, there would be hardly any jobs left. This is of course not true. Bulldozers took the place of men with shovels. Cars put railroad workers out of business. Elevator operators, typists, blacksmiths, and manual telephone operators jobs all vanished over the 20th century.
Yet official unemployment in September of 2018 was the lowest in nearly 50 years. In fact, the labor force participation rate has actually gone up since mid-century due to women entering the workforce. We have more jobs now than ever. Predictions of technology harming the workforce have constantly failed since the dawn of technology itself. Despite this, Yang says automation in the next 12 years will cause a crisis. He claims UBI will handle that crisis. He is wrong on both accounts.
Technology Fear-Mongering is Unrealistic and Unfounded Technology serves to make the economy stronger. Machines and tools make us more productive. The entire goal of economic progress is to make us more productive, more efficient, have more consumer goods available, more leisure time, and higher standards of living. This is achieved by higher productivity and efficiency. We are better off not needing twelve people with shovels to do the same thing as a bulldozer.
Yang zeroes in on truck drivers in particular. He cites the 3.5 million truck drivers in the nation. Where will those drivers be if their jobs are automated away in 12 years (as if all companies can afford and will buy self-driving 18 wheelers in that time frame)? We should ask what happened to all of the VHS manufacturers, the landline phone manufacturers, and video store workers? What happened to the 1.5 million railroad workers or the typewriter makers and technicians? Labor is fluid and finds new work. Job hopping has already been on the rise. People learn new things and get new jobs. They do it constantly. Society creates and destroys different kinds of jobs through technology. Markets adjust and people will find new work, just as has been in the past. The prediction that technological advancement will be too rapid for us to adjust is a hollow, misguided forecast that lives on despite its losing record.
Universal Basic Income is Unaffordable Aside from that, lets look at the economics of Universal Basic Income. Yang’s proposal is $1,000 a month for all people aged 18-64. The reason he cuts it off at 64 might be that his proposal is essentially Social Security for all and the existing program begins around age 62. The total cost of his proposal would be around $2.5 trillion dollars per year. He claims this can be done be creating a massive Value Added Tax and eliminating money elsewhere in the budget from an already $4 trillion dollar budget. This is not feasible and would certainly add onto the over $22 trillion dollar debt tab of the Federal government. Ultimately, the plan is just an expanded variation of existing welfare programs that expands to fiscally unsustainable levels and add a huge tax on the nation.
Wrong Diagnosis, Wrong Prescription Job displacement does occur and people must adjust. Its worthy to take notice of this and know that people can use help when finding new jobs and new careers. However, technology should not be avoided and feared because it replaces currently existing jobs. It makes our lives better and leads to the liberation of labor for newer, better jobs. The next generation of technological development and automation won’t result in a joblessness crisis. To the manageable extent that technology does displace jobs, Universal Basic Income doesn’t help this in any meaningful or realistic way. Yang wants to provide an ineffective, unaffordable solution to a problem that doesn’t exist.
Thanks to the recent efforts of such figures as Democratic Presidential candidate Andrew Yang and British Shadow Chancellor John McDonnell, the issue of Universal Basic Income (UBI) has been back at the forefront of the public discussion on economic issues, along with the various arguments and justifications for introducing such a policy. While many of these justifications have become quite familiar over the years of waxing and waning interest in UBI, it is interesting to note the recent surge of interest in one particular argument which sounds more like something from a science fiction novel than an economics textbook.
This argument runs roughly as follows: In the not too distant future, rapidly advancing technology will allow robots and artificial intelligence (AI) to perform many of the jobs now being done by humans, and to do so more cheaply and efficiently than humans ever could. This will result in robots/AI replacing humans in almost all jobs, making the vast majority of people permanently unemployed, and without Universal Basic Income how will they (the people) be able to keep food on their tables?
Of course, the idea that advances in labor saving technology will lead to catastrophic unemployment and declining living standards is hardly new, arguably dating back to ancient Greece or earlier, and economists (not to mention the facts of history) have been refuting the idea for nearly as long as economics has existed as a self-conscious science.
However, as familiar as the generally luddite tone of this new argument for UBI may seem on its surface, it nevertheless does have one key difference from the more traditional arguments against labor saving technology. This difference not only sets the new AI scaremongering argument apart as meaningfully different than the arguments which have gone before, but also highlights a fundamental misunderstanding its proponents suffer from, concerning the very nature of what a market economy is, and what drives it.
What marks the AI scaremongering argument as new and meaningfully different is its altered assumptions about the breadth of different jobs which the new technology would be capable of usurping from human workers. In previous eras, even the most hysterical denouncers of labor saving technology shared an unspoken understanding of the limited capabilities of the technologies they opposed. When the spinning jenny was introduced in the 1760s, they may have argued that it would cause unemployment in the textiles industry, but none of them would have claimed that the same machine would cause mass unemployment among butchers, lawyers, or pub landlords. When automobiles became widely available, they may have argued that buggy whip manufacturers were at risk of permanent impoverishment, but few would have argued that the existence of cars posed an equal threat to the jobs of teachers, waitresses, or doctors.
However, given the near-total lack of public understanding of what AI actually is and what it’s capable of, not to mention the irresistible temptation to sensationalize modest scientific advances into eye-grabbing and alarmist headlines, the new AI scaremongers have allowed their imaginations to run wild when speculating as to which jobs are under threat from this mysterious new technology. The result is that they, and much of the public, seem to believe AI is (or soon will be) capable of almost anything they can imagine, in the same way that so many charmingly naive 80s movies portrayed home computers as essentially "omnipotent science magic."
It is this assumption that AI and robots will soon be able to accomplish almost all jobs more cheaply and efficiently than humans, which marks the new AI scaremongering argument as fundamentally different from the previous arguments against labor saving technology. Economists had previously been able to argue that labor saving technology frees up resources and lowers prices in a way which results in net quality of life improvements for society as a whole, creating new jobs and opening up new types of industry, even if it results in short term unemployment for a small minority. But would that really still be the case if the new technology is capable of making human labor obsolete in all types of job?
There are several objections one could make against this argument, not least of which being its dubious assumptions about the capabilities of AI technology. However, the sign of a truly weak argument is not only a reliance on unrealistic assumptions, but a failure to stand up to scrutiny even when its assumptions are taken as given.
Even if it were true that robots and AI could perform absolutely all jobs currently being done by humans, and could do so more cheaply and efficiently than humans, the AI scaremongers would still be incorrect to conclude that robots and AI will replace humans in all, or even most, jobs. The source of their incorrect conclusion is a fundamental misunderstanding of what drives business activity in a market economy. Entrepreneurs are not driven by an arbitrary desire to pursue the most technologically advanced, the most efficient, or even the cheapest production process, purely for the sake of it, as seems to be the assumption of the AI scaremongers and many other anti-capitalists. Rather, the fundamental driving force in a market economy is to direct and organize production in the way that best satisfies consumers’ preferences.
For evidence that this true driving force of the economy does not necessarily lead to increasing reliance on technology, even if that technology would be more cheap or efficient in some objective sense, one need look no further than the sectors in which human workers already are being replaced by ‘robots’ of a sort. Readers who have visited a fast food chain such as McDonalds in the past few years may have noticed an increasing number of self-service touch screens, reducing the need for human staff to take orders. But if this technology exists and is already in profitable use at these fast food chains, why hasn’t it been adopted by all other restaurants? If the AI scaremongers believe robots and AI will necessarily replace all human workers when the former can perform the same job more cheaply and efficiently, how do they account for the fact that human waiters haven’t already been replaced by self-service touch screens at the Savoy Grill or The Ritz? The absurdity of the question illuminates the fact that a desire to satisfy consumer preferences, not bare efficiency and cost-cutting, is the key motivator of entrepreneurial decision making in a market economy.
With a little thought, it is easy to imagine many services which consumers might prefer to have provided to them by human staff, even if a machine were technically capable of providing the same service more cheaply: nurses and care providers, entertainers, chefs, and teachers would likely fall into this category, as would many other jobs.
Given the persistent popularity of UBI across the political spectrum, its advocates are unlikely to abandon any of their increasingly-familiar arguments any time soon. However, it seems unlikely that their new argument about AI-induced mass unemployment will turn out to be the silver bullet they were hoping for.
For several generations now, one of the loudest criticisms of capitalism is summed up by dismissively characterizing the working class under free markets as being “free to starve.”
For instance, this 2017 Socialist Worker article described Marx’s critique of capitalism as a system in which “workers are free in a ‘double sense’— free to work or free to starve.”
In other words, workers face no choice other than to sell their labor to owners of capital to ensure their own survival.
Socialists rally behind this critique as if it is a unique feature of a capitalist economic system for people to be compelled to work to avoid starvation.
But its not capitalism that necessitates humans to work to avoid their demise, but nature itself.
In a state of nature, even on a desert island, man must engage in productive behavior (work) to attain food for his survival. Food does not just effortlessly fall into his mouth.
To grow vegetables, he must exert effort farming. To eat meat, he must exert effort hunting. For other foods, perhaps climbing trees in order to pick fruit off the branches.
Which brings us to the issue of how one chooses to work to obtain the resources needed to feed himself.
According to the Socialist Worker, there really is no choice at all. “(C)apitalism depends on one group of people that owns the means of production — factories, offices, machinery, raw materials, etc.—and another, much larger group that owns none of these, and must go to work for the smaller group to survive.”
Moreover, socialists will insist that the owners of the means of production create no value and use their power over workers to exploit them for profit.
This is a false dilemma, however, because the “group” that owns the means of production isn’t set in stone. Individuals are free to acquire capital goods to produce products that generate income for them.
The real question, then, becomes: why do so many choose to work for wages for capitalist owners of the means of production? What purposes do capitalists really serve?
Let’s start with the example of "Smith." Smith has no job and owns no means of production. To feed himself and his family, he only has his bare hands to use to produce goods to survive. Obviously, Smith’s productivity will be close to zero. At best, he may be able to grow a few vegetables and catch a few small animals to feed his family. Or he makes small crafts with his hands using resources he finds in nature in order to sell for revenue. If the Smith family survives, a bare subsistence level will be all they can hope for.
To be more productive, and guarantee his and his family’s survival, obviously Smith needs access to capital goods in order to increase his productivity.
Now Smith faces a choice: acquire capital goods to use himself to produce goods for sale, or go to work for a capitalist who provides means of production with which Smith can combine his labor with in exchange for wages.
There are three main benefits the capitalist provides that leads Smith, and most people, to find it more beneficial to work for a capitalist.
The capital goods provided by the capitalist make the worker far more productive than the worker would have been on his own. Most individuals have limited resources, and would be able to obtain relatively fewer, or otherwise less productive, capital goods than the capitalist can provide. Higher productivity will translate into higher wages for the worker compared to the revenue he could have generated producing and selling goods on his own.Working in a company for a capitalist enables the worker to earn a living immediately. Instead of having to wait for the completion of the production process and the sale of the finished goods to obtain his revenue, going to work for a capitalist enables the worker to collect income right away. The workers’ wages are a de facto advance on the revenue the finished goods bring in; an advance not afforded the individual producing with capital goods himself.The capitalist bears the risk of potential losses. Appetite for risk is in limited supply. Most people are not willing to risk losing their own funds (or borrowed funds that they will have to repay) in the event their produced goods are not valued by consumers at a price higher than the production costs. In short, the wage-paying system allows workers to earn more income than he would individually, get paid well in advance of the finished goods being sold, and export risk of investment loss onto the capitalist.
Not only is the “free to starve” critique misplaced because the requirement of work to sustain one’s life is the fault of nature, not capitalism, but the capitalist provides valuable services that make workers better off than they would be otherwise.
Even for those of us who don't watch soccer — either men's or women's — it's impossible to avoid the media frenzy over the fact that the women's US Soccer team's World Cup victory.
This amazing performance from the women's team — we are told — highlights how absurd it is that the players on the women's team are not paid as much as the players on the men's team. Some fans and players even chanted "equal pay" in the wake of the World Cup victory.
When it comes to professional sports, however, how well a team plays is not what determines the pay of players. What matters is how much revenue the team earns from ticket sales, television deals, product licensing, and endorsement deals.
Revenues follow from the entertainment value of the play. When it comes to compensation, what matters is the ability of the players to entertain. Pro athletes, after all, are fundamentally just entertainers, no different from the buskers who do handstands on the street corner.
Some people may mistakenly believe that chasing a ball around constitutes some sort of highly-valuable enterprise in itself — but unless consumers are willing to pay to watch it, it has no large-scale economic value.
Thus, the question of whether or not the female athletes are "underpaid" comes down to how much revenue their performances generate.
So, do the women generate more revenue? Unless we're talking about just the last one or two years, the answer appears to be a clear "no." But even in recent years, as World Cup victories have piled up for the women, it looks like revenue have only just begun to equal that of the men's team.
At Forbes, Mike Ozanian note that generally speaking, men's soccer generates revenues at much higher levels:
The men's World Cup in Russia generated over $6 billion in revenue, with the participating teams sharing $400 million , less than 7% of revenue. Meanwhile, the Women's World Cup is expected to earn $131 million for the full four-year cycle 2019-22 and dole out $30 million to the participating teams.
But what about the US women's team specifically?
According to the Wall Street Journal:
From 2016 to 2018, women’s games generated about $50.8 million in revenue compared with $49.9 million for the men, according to U.S. soccer’s audited financial statements. In 2016, the year after the World Cup, the women generated $1.9 million more than the men. Game revenues are made up mostly of ticket sales. In the last two years, at least, the men’s tally includes appearance fees that opposing teams pay the U.S. for games.
So, very recently, women have begun to outpace the men in ticket sales. But, as the WSJ admits: "ticket sales are only one revenue stream that the national teams help generate."
And what about revenues from broadcasts? It seems that "TV ratings for U.S. men’s games tend to be higher than those for U.S. women’s games, according to data collected by U.S. Soccer."
Moreover, Politifact was unable to confirm that total revenue is, in fact, higher for the women in recent years:
During the three years following the 2015 Women’s World Cup, the women’s team brought in slightly more revenue from games than the men’s team did. While marketing and sponsorships are sold as a bundle, there are anecdotal signs that the women’s brand is surging in popularity.
However, it’s harder to say whether the women are ultimately paid less than the men, due to the lack of transparency and the complicated variables that feed into the compensation. Several experts said the reality may be murkier than a shouted catchphrase [i.e., "equal pay!"] can capture.
For the sake of argument, let's say the women do bring in more revenue. The fact this is such a recent development would help explain why the pay structure has yet to catch up with revenues. Moreover, if US Soccer is going to risk paying out-sized salaries and benefits, it's going to have to first be comfortable that the women's teams are a reliable and sustainable revenue source.
Ultimately, however, whether or not the women get "equal pay" depends not on the team owners, but on the consumers. If the women's team wants just as much pay, it will need to generate just as much revenue. That is, these things will need to happen:
The consumers are willing to pay at least as much ( in terms of ticket prices) to see women play as to see men play. They'll also need to watch broadcasts in numbers similar to men's broadcasts, thus driving up ad revenue for the women's team.The women's teams will then generate more revenue.Thus, female athletes will then produce more revenue than male athletes.Female athletes are therefore paid more by the owners. If the fans want the women to be paid more than the men, the consumers will have to spend more.
Even some of the players recognize this. Earlier this week, US women's team member Megan Rapinoe outlined how consumers can support a pay hike for the women's team : "Come to games ... buy players' jerseys ... become season ticket holders."
Rapinoe is right. When the consumers pay more to see the women. The women will be paid more to play.
Listen to the Audio Mises Wire version of this article. One story has Japanese lawmakers worried about the future of Japanese enterprise. Nobel laureate Tasuku Honjo, whose research led to the creation of the revolutionary cancer drug Opdivo, is suing the company for which he developed the drug; they promised him substantial compensation and subsequently rescinded their offer.
Speaking of the issue more generally, Minister Naokazu Takemoto, who is the minister of IT policy, said that “There is a great gap between Japan and the United States that we have to close.” Namely, there’s a gap in executive compensation that attracts entrepreneurship and innovation away from Japan and to the US. Honjo’s story is a representative example.
His story begins with a lawsuit over patent infringement when US drugmaker Merck & Co. copied the drug from Ono Pharmaceutical Co. Ltd. in Japan and its US counterpart Bristol Myers Squibb Co. The lawsuit was settled in 2017 and entitled Ono-Bristol to $625 million and a percentage of Merck’s net sales of the drug through 2026. According to Asashi Shimbun, Ono promised Honjo 40 percent of the patent royalties from Merck but reneged on the deal, informing him that he would receive 1 percent instead. Honjo is suing Ono for not giving him the share of the money allegedly promised to him.
Ono does not want to pay Honjo more than 1 percent, because “It would be difficult for the company to comply with his demand, which involves a major change in the terms of the agreement, because such a revision would influence contracts with other researchers and the pharmaceutical industry as a whole, industry sources said.”
Looking at this case, one might ask, Who in the world would do business with Ono Pharmaceutical going forward? And is this a typical trend among Japanese firms?
If we look at other discrepancies between Japan and the rest of the developed world, the gap in competitiveness between Japanese firms and others becomes clear. Corporate executives are paid significantly less in Japan. The Japan Times reported, ”The median CEO salary at Japanese companies with revenue of more than ¥1 trillion is one-tenth of counterparts in the U.S., and incentive pay makes up just 14 percent of the total, against 69 percent in America.”
The pay gap extends beyond executives. For example, system engineers straight out of college usually earn ¥200,000–¥300,000 ($2,000–$3,000) a month, whereas the average starting annual salary in America for the same position is close to $6,000 a month. I would be remiss if I did not include a disclaimer, however. Japanese firms have a culture of better benefits like biannual bonuses, transportation, and company-subsidized housing, but it falls short of US compensation and limits the choices that additional income allows.
For recent graduates, there is no negotiation with hiring companies; personal skills and qualifications will not result in higher pay or better benefits in most situations. This stems from a strict collectivist mindset. Seniority determines pay at many firms, not skills or achievement. Low- to upper-level workers are also all subject to arbitrary relocation.
My experience working at a Japanese company in 2018–20 revealed to me that employees do not or cannot negotiate when they are assigned to a new location; their only option is to quit. Your actual department and job are also subject to arbitrary reassignment, sometimes having nothing to do with your interests or skills. These moves can happen as frequently as every two to three years. This results in a phenomenon known as tanshinfunin, where employees move, leaving their families behind for years at a time.
If one word could describe employment and business in Japan, it would be “inflexible.” This does not only apply to innovative scientists like Honjo, but also to executives and low-level employees. As the lack of a competitive edge in Japan becomes clearer, Japanese firms will lose vital human capital to other countries. People with revolutionary ideas and abilities like Honjo will inevitably sell their skills, products, and labor to the highest bidder, which means companies in the US and elsewhere.
Many Japanese companies need to reform their business practices, or they face a brain drain and lost opportunity. Government should facilitate this by rolling back oppressive regulations, taxes, and barriers to competition so that the best Japanese companies flourish and allow inept ones to restructure or fail. Ono’s treatment of Honjo represents the very real need for change lest Japan’s economy falls further behind.
Listen to the Audio Mises Wire version of this article.
The United States added 1.76 million Jobs in July 2020, compared to a consensus estimate of 1.48 million. Unemployment fell to 10.2 percent versus the 10.6 percent expected. It is true that the rate of job creation is slowing down and labor force participation rate remains at 61.4 percent, but we need to compare the figures with those of the rest of the world, where we are witnessing a worrying “jobless recovery.”
Headline official unemployment rates are misleading due to different subsidies and furloughed jobs. If we use comparable figures, the United States's inactive share of the labor force is significantly smaller than the same figure in the eurozone. In the eurozone, those who are unemployed, in subsidized jobless schemes, and furloughed account for more than 23 percent of the labor force, according to Morgan Stanley. This compares with the United States’s 16.5 percent sum of unemployed plus not at work plus excess dropouts. It is a particularly important difference that shows that the United States is outperforming in the recovery. It also shows something that many commentators ignore: massive entitlements and government spending plans have not helped the eurozone improve its job market in the recovery.
In this crisis, there have been two policies when addressing the unemployment challenge: dynamism versus intervention in job mechanisms. The second has allowed the eurozone to have an optically low unemployment rate while around 40 million workers remain in furlough schemes. Preserving labor market dynamism may have created alarming headlines for the United States, but it has allowed it to recover faster and to post unemployment numbers, both official and underemployment rates, that would be the envy of many eurozone countries.
Now that we have established the differences between both economies, we must alert of a global problem: the jobless recovery.
Markets and investment analysts have greeted the latest global PMI (purchasing managers’ index) figures with euphoria. Most leading economies posted PMIs in expansion in July, and the global index pointed to a return to growth both in services and manufacturing…But companies continued to shed jobs after three months of reopening.
If we analyze the job component of global PMIs published by IHS Markit, we can see that all sectors except three continued to destroy jobs in July 2020 as firms faced overcapacity and weak growth in sales. The worst job losses came in the Auto and Auto Parts sector, Media, Metals and Mining, Technology Equipment, and Tourism and Recreation. The only sectors that created jobs in July on a global level were Pharmaceuticals and Biotechnology, Healthcare Services, and Real Estate. The most worrying part is that the real estate job creation was mostly temporary and seasonal.
A global PMI recovery with widespread job destruction shows us that most of the headline PMIs simply reflect a month-on-month bounce from depressed levels, not a return to precovid industry levels. Yes, there is a recovery, but—as we have mentioned in this column before—if governments don’t implement significant supply-side measures that incentivize new business creation and growth in small ones, we may find that the global activity trend weakens almost as fast as it bounced.
So far, the United States is leading in employment improvement, but the full recovery is extremely far away. The United States cannot be complacent and accept an unemployment rate of 9.3 percent in 2020 falling to 5.5 percent in 2022 as the Federal Reserve predicts. Unemployment needs to be back to the precovid 3.5 percent rate quickly, and that will only be achieved with bold supply-side measures, tax incentives, and a strong policy of capital attraction. The United States needs to separate itself from other governments’ policies. It must liberalize and cut red tape to boost job creation, because the recovery is stalling in many developed and emerging economies, and copying failed interventionist measures will not bring employment back.
Originally published at dlacalle.com.
Free marketeers have rightly written many refutations of the minimum wage. However, it’s difficult to beat something with nothing, and so this article will outline major ways in which wages actually rise: through capital accumulation and the honing of skills that others value.
What Determines Wages? Before looking at how wages can increase, what determines them in the first place? Wages tend to equal the productivity of the worker. If Jones the chef can bring in thirty dollars an hour for Smith, the restaurant owner, Smith will have to pay Jones almost thirty dollars an hour, or else another restaurant can snag Jones away along with the revenue he offers.More precisely, wages tend to equal the discounted marginal revenue product of workers in a free market economy.
This competition between employers over workers is the reason why 97.9 percent of hourly workers in the US make more than the federal minimum wage. The federal government doesn’t mandate these high wages, but the market does.
Many states have their own minimum wages set higher than the federal minimum wage, and yet many hourly employees in every state are paid higher than they are legally required to be, not because employers are generous, but because of worker productivity and competition over scarce labor.
One: Society Accumulates Capital Goods The first way a worker’s wage can grow requires nothing of the worker at all. Holding a given worker’s situation constant, when the rest of society is able to produce more goods and services, prices will fall, and the real value of wages will increase.
If factories and workshops become more productive, even if this excludes a given worker’s place of occupation, then when he goes to the supermarket, his paycheck will go farther. There are more goods to go around, and prices have fallen.
This raises the question, how does society become more productive? The two-step process is saving and investing in capital goods (the machines and tools that produce other goods). Rather than spending all earnings on ice cream and videogames, people save their money to maintain existing capital and invest in new tractors, machine tools, assembly lines, etc. Less present consumption is traded in for more future consumption.
Two: The Industry Upgrades Its Complementary Capital A second way a worker’s wage can increase also requires nothing of the worker. His wage will rise if his industry upgrades the capital goods he uses and thereby makes him more productive.
Textile workers who sew by hand get sewing machines, farm workers with scythes get combine harvesters, construction workers with shovels get bulldozers, etc. When this new capital allows workers to produce more for their employers (and society) than they could before, their value to their employers increases, and their wages increase.
In technical terms, new capital that is complementary to labor increases the productivity of, the demand for, and the price of labor.
This is the flip side of unemployment by automation. Sometimes capital is a substitute for labor, but it’s often a complement. This is largely why workers in relatively capital-poor countries can earn multiples more when they move to countries rich with capital complementary to their labor, even holding their skills constant.
Three: The Worker Accumulates Human Capital The third route to higher wages comes from the worker himself and is the most obvious. If wages tend to equal productivity, workers can increase their wages by improving their skills to offer more to their employers’ bottom lines, which also means contributing more to society’s material provision.
Alternatively, they could learn altogether new skills that are in higher demand and lower supply to secure new, higher-paying jobs.
Removing State Barriers Ultimately, only sacrificing present consumption and investing in capital (physical or human) to increase productivity can move society forward against scarcity. Increasing productivity takes time, but the state has imposed many obstacles to productivity that would raise wages rapidly if removed.
It goes without saying that eliminating or reducing the income and payroll taxes would increase worker pay, but there are less obvious wage-reducing taxes.
A sales tax is similar to destroying a portion of everything a worker makes, because the state takes a fraction of the item’s sale receipts. In this way, the sales tax is a reduction of the worker’s productivity, and consequently the wage the worker can command. After his paycheck is reduced, the worker pays the sales tax again, when everything he wants to buy is more expensive.
A wealth tax, such as the one Elizabeth Warren is proposing, penalizes the ownership of capital goods, which drive the first two mechanisms for raising wages outlined above. The list of taxes goes on, and then there are the regulations, which won’t be elaborated here. The accumulation of physical and human capital means more goods and services to go around for everyone, and a bigger paycheck for the worker.
In 1971, Isaac Asimov wrote an extraordinary novel, The Gods Themselves, about a machine that generates unlimited energy for free, defying the fundamental economic principle known as scarcity. It is later learned that the Electron Pump is originating from a hole in space that connects parallel universes. Doomsday is nigh as it is discovered that galaxies will soon be destroyed and that the sun will metastasize into a supernova. The crux of the story is comparable to what is transpiring in California.
State lawmakers possess an infinite source of good intentions, using the eternal supply to pave roads to hell. Wielding the power of this limitless benevolence and munificence, politicians are regulating the lives of citizens while eviscerating their existence in the process. If this is goodwill, then we can only imagine what the state is capable of when it desires to ruin you or your business.
The Gig Is Up In September, California’s Democratic governor Gavin Newsom signed into law AB-5, which requires most companies to reclassify freelancers and contingent workers as full-time employees. Doing this means such individuals would be eligible for a guaranteed $12–$13 state minimum wage, benefits, and protections under California’s immense code of employment laws. It went into effect on January 1.
“As one of the strongest economies in the world, California is now setting the global standard for worker protections for other states and countries to follow,” said Assemblywoman Lorena Gonzalez (D), the author of the bill, in a statement.
AB-5 was lauded by organized labor, but it turns out that laborers are not enthusiastic about it.
The law impacts about two-thirds of the state’s two million independent contractors; it does exempt many white-collar professionals, including architects, attorneys, doctors, and realtors. But childcare specialists, nurses, writers, and janitors are not afforded the same luxury. Truck drivers received a last-minute exemption after weeks of contentious battles, but they reportedly fled the state before the country bellowed "Auld Lang Syne." As for the truckers who stayed behind, the California Trucking Association claims it is receiving calls from individuals who are leaving the state.
Freelance writers may be the next ones to wave goodbye to California. Moving forward, freelancers are limited to thirty-five submissions annually per client. As any writer will attest, it can be easy to reach this quota when you are submitting content to media firms, leaving you on a never-ending hunt for more companies that will accept your prose on the existential crisis in the age of deconstruction.
Decline in Clients and Projects Just weeks after AB-5 became law, Vox Media announced that hundreds of freelance writers, primarily sports contributors for its SBNation.com website, would be given the pink slip. The irony behind this corporate decision is that Vox endorsed the bill and celebrated its passing. Now Vox is replacing them with twenty new full- and part-time staff members.
When Gonzalez was confronted with this on Twitter, she tweeted:
These were never good jobs. No one has ever suggested that, even freelancers. We will continue to work on this next year.
She further dismissed complaints, urging everyone to “educate” themselves on the benefits of AB-5.
One Twitter user summarized the thoughts of the many affected by this law: “Wow, you really suck at this.”
CNBC spoke with Jeremiah LaBrash, who earns half of his annual income from freelancing. Based in Los Angeles, the freelance cartoonist noticed the decline in potential clients and projects. When LaBrash submitted proposals to media companies, these employers turned him down when they learned he is from California. He told the business news network:
I’ve had them hire me and then come back and say they’re no longer interested. All of a sudden, someone I’ve never talked to says, “We’ve decided not to move forward.” I’ve never had that happen before this year.
My savings are stagnant. I really can’t look into buying a house. The housing market here is hard already.
Once again, the paternalistic central planners strive to make the decisions for adults. They failed to comprehend that a lot of freelancers enjoy being independent professionals, setting their own hours, and opting for freedom rather than a nine-to-five structure. The bill is marketed as a safety net, but the question is: what good is a safety net if you do not have any work?
Leave California or Bust! When first reporting on the bill, Kelli Ballard at Liberty Nation wrote that the historic motto had been “California or bust!.” After years of big government encroachment, Ballard posits that it is now “Leave California or bust!.” It may not be that simple. The biggest concern is that other blue states will eventually adopt similar legislation to combat the $1 trillion national gig economy, proving that there is no escaping bad economics.
Originally published at Liberty Nation.
Since the $15 minimum wage has become a major policy proposal in America, many politicians feel that certain forms of work are undignified.
This became a controversial talking point when Congresswoman Alexandria Ocasio-Cortez declared that New Yorkers deserve “dignified jobs” after a deal to build a second Amazon headquarters in Queens fell through. In another incident, the congresswoman was aghast at how several people, some which were homeless, were paid to wait in line for lobbyists who wanted spots to get in first at a hearing. She expressed her astonishment that this was “a normal practice and people don’t bat an eye.”
For an elected official who claims to be fighting for the common person, this kind of outlook reeks of elitism. It completely ignores that people must find ways to make ends meet. That sometimes means taking on “undignified” jobs. In fact, these “undignified” jobs are often beneficial when considering the alternatives. For the homeless, this could mean the difference between holding a steady job or starving in the cold.
Work is a Stepping Stone for Many Success Stories When we think about it, “undignified” work is American as apple pie. Industrial magnates like Andrew Carnegie started out working in a textile mill making $1.20 a week. Such working conditions would elicit responses of shock and horror from intellectual elites these days. Back then, when there was actual labor freedom, this was how people got their feet wet in the workforce.
During the Gilded Age, social mobility was almost a given thanks to the government’s relatively hands-off approach in the economy. There was no income taxation, no federal regulatory maze, and no central banking apparatus to create distortions in the economy and impede people’s ability to work.
Like the Carnegie case, a good portion of American success stories were wrapped in modesty. Some of America’s most successful entrepreneurs started out working in many so-called “dead-end” jobs. What we forget is that these jobs provided a solid foundation for these entrepreneurs to move forward.
Many forms of basic jobs lie in the small business sector, which to be fair, has been largely downplayed by commentators across the political spectrum. As Ryan McMaken illustrates, small businesses give workers valuable labor experience while also providing social benefits. Sadly, the same culprit—government—gets in the way of small business development. McMaken expands:
At the same time, governments at all levels relentlessly hand down ever more regulations and mandates to businesses of all sizes. Yet it is small firms who suffer the most because they have less access to financing, equity, and resources needed to cope with mounting regulatory requirements. Licensing and labor regulations create more pitfalls for small business owners to fall into while locking many potential business owners out of industries entirely, unless they comply with arbitrary "training" or certification mandates.
Mises Understood the Elite’s Disdain for “Dirty Work” Given how much the economy has shifted in the West towards more service-oriented, white-collar work, it is automatically assumed that white-collar work is the only path to take. Thus, public policy should be designed to accommodate that. However, thanks to the rise of personalities like Mike Rowe and his series Dirty Jobs, there has been somewhat of a resurgence of work that is usually frowned upon by political elites. In fact, some individuals have been able to carve out lucrative niches in these fields. And that ruffles the feathers of many political commentators, which Mises even observed decades ago in The Anti-Capitalistic Mentality:
Besides being harassed by the general hatred of capitalism common to most people, the white collar worker labors under two special afflictions peculiar to his own category.
Sitting behind a desk and committing words and figures to paper, he is prone to overrate the significance of his work. Like the boss, he writes and reads what other fellows have put on paper and talks directly or over the telephone with other people. Full of conceit, he imagines himself to belong to the enterprise's managing elite and compares his own tasks with those of his boss. As a "worker by brain" he looks arrogantly down upon the manual worker whose hands are calloused and soiled.
Contrary to popular belief, certain individuals have struck it rich in fields like plumbing and welding by using the knowledge they learned as average workers and then applying it in the entrepreneurial realm. This obviously generates fury among certain white-collar workers which Mises also touched upon:
It makes him furious to notice that many of these manual laborers get higher pay and are more respected than he himself. What a shame, he thinks, that capitalism does not appraise his "intellectual" work according to its "true" value and fondles the simple drudgery of the "uneducated."
Mike Rowe correctly notes that Americans have become fanatically obsessed with the degree to white-collar work pipeline which often involves individuals racking up considerable amounts of debt to later work in fields that they don’t like. Bear in mind, this inflated cost of education is no coincidence. It is the product of misguided government subsidies in the student loan industry and accreditation standards that protect schools from competition.
The State is Still the Main Culprit Despite talking heads’ claims of the changing nature of politics, certain themes have not changed. The managerial state remains intact.
Nevertheless, we should always remind the working class that their “undignified” work should be celebrated. Often times, many of the economic struggles they face can be blamed on government intrusions in the marketplace. After all, the American story is filled with countless cases of individuals starting out at humble jobs to later go on to do bigger things. The key factor in those cases was that the state was small enough to allow people to freely progress according to their efforts and not have to worry about being stuck in a career plateau.
Following the 2019 Women’s World Cup, the issue of women’s pay moved even more to the front pages as Women’s soccer star Megan Rapinoe spoke out:
Men are so often paid and compensated on the potential they show, not necessarily what they’ve actually done—which normally I would say, we outperform what our contract was.
It has been demonstrated that a man who simply wins an individual qualification game in the World Cup has higher potential earnings than any woman received for winning the entire World Cup. This argument has raged on for decades, but this outcome of Women’s World Cup champions being paid less than men who merely qualify has heated the debate significantly more within the past few years.
This led to tennis star Stefanos Tsitsipas making the claim that because men and women win the same prize money in Grand Slams but play a different number of sets, women, who currently play three-game sets, should play five-game sets as the men do. He went on to explain that the five-game sets that men play simply take a different psychology and a different level of endurance in comparison to the three-game sets that women play.
Prima facie, to the layperson in economics this is a perfectly logical retort to the outcomes-based arguments of the other side. However, this in no way accounts for any disparity in pay. While the counterfactual cannot be proven, it is very likely that if Tsitsipas had only been playing best-of-three sets instead of best-of-fifive, he would have still been compensated more than his female counterparts.
The reason for this is that this assumption rests on the labor theory of value, which is simply false and needs to be unilaterally rejected. The logic behind this is that the male athletes engage in two additional games per set of labor and therefore are deserving of more pay. In reality, the consumers impute value to the product through their subjective valuations. As Ludwig von Mises said:
Value is not intrinsic, it is not in things. It is within us; it is the way in which man reacts to the conditions of his environment. Neither is value in words and doctrines, it is reflected in human conduct. It is not what a man or groups of men say about value that counts, but how they act.
It is incredibly tempting to give into this labor-theory-of-value or cost-theory-of-value way of thinking. When we work, we feel that the more we do, the more we should be paid. This is because in the world we almost never find examples of times when someone is asked to do more work and is not paid more in exchange. But this does not happen because of a direct correlation between quantity of work and value provided.
Rather this is because in instances where more work does not provide more value, the labor doesn’t happen at all because the laborer will not pursue that option. We must remember that, as French economist Frédéric Bastiat described, the good economist sees what does not happen and why it does not happen. We must see that this labor does not happen because it does not provide more value. If we were to add on that labor, it would not inherently add more pay.
When simply discussing economics in theory, this is a little easier to wrap our minds around. However, when discussing real-life athletes, it feels hard to accept this. It is so easy to see that athletes are paid for their labor, for their ability to exert effort at levels that the average person simply cannot. If the athlete were to exert even more of this ability, then it is only natural that they would be paid more.
We must be better economists than that. We must not fall into the trap of explaining differences in pay through things like differences in amount played, as Tsitsipas has. We must avoid that temptation and instead remind the world that value comes from consumers and that if we see discrepancies in values, it is because the consumers have come to different subjective valuations.
We as value-free economists cannot say whether this is good or bad. We can simply say that this is why the values have come to be. However, if one were to pass an ethical judgment and deem it to be wrong that the consumer values male sports over female, then one would have to pursue a solution not simply by adding more games, but by better addressing the consumers’ needs and wants. We as economists must take these opportunities to reject unsound value theories and instead push for much more sound economics.
Throughout history, the state has justified itself on the grounds that it is necessary to protect us from others whose habits and beliefs — we are meant to believe — are dangerous. For millennia, this fiction was easy to maintain because most people interacted so little with people outside their nearly autarkic — and therefore impoverished — communities.
But, with the rise of industrialization and international trade in recent centuries, the state's claim that it is necessary to keep us “safe” from outsiders has become increasingly undermined.
Much of this is thanks to the fact that in order to benefit from the market, one must engage in activities designed to serve others and anticipate their needs. As a result, trade increases our understanding for both members of our community and even the stranger; it also makes us realize that other people are much like us. Even if they speak strange languages or have odd customs and traditions.
The Market Order and CivilizationThis is in essence Say’s Law, or the Law of Markets, which states that in the market we produce in order to trade with others so that we can thereby, indirectly, satisfy our own wants: our demand for goods in the market is constituted by our supply of goods to it. In order to effectively satisfy other people’s wants we need to not only communicate with them, but understand them. If we don’t, then we’re wasting our productive efforts for a random result. Obviously, we’d benefit personally from learning what other people want, both their present wants and anticipated future wants, and then produce it for them.
So far so good. Most people (except for Keynesians) grasp this very simple point about the market — and how it contributes to civilization and peaceful interaction. But all people aren’t saints, so good, hard-working people risk being taken advantage of as they have nothing to set against such actions. Without a central power such as the state, who will protect us from such people?
Answer: the web of voluntary transactions aligns people’s interests. In the market, “bad people” are not only defrauding, stealing from, or robbing a single person or family. They are, in effect, attacking the community of interdependent producers and network of traders.
Imagine a town with a baker who specializes in baking bread that people in the town like, but that he doesn’t necessarily fancy himself. Instead, he sells the bread in order to earn money that he uses to buy from others what he truly wants. Others similarly specialize their production to produce what others want, including the baker, so that they can use part of their income to buy bread. When a thief steals from this baker, he negatively affects the town’s bread supply — and thereby also makes the baker unable to effectively demand goods from others. This affects a lot of people, not only the baker: it affects all people who wanted to but now can’t buy bread and all those who expected to but no longer can sell their goods to the baker.
The network of exchanges and the specialized production for others thus creates a community of interdependent producers whose interests are generally aligned: they have all increased their productive effort by supplying a single good that is in high demand, and thereby made everybody better off. But it also means it is in their own interest that no one is unjustly treated and disadvantaged, whether the victim of a “bad person” is an existing or potential supplier of goods they desire or existing or potential customer of the goods they produce.
They all benefit from this order, since their productive efforts are used where they do most good. But they are also all in it together — they are all affected if things go wrong. It is not strange, then, to see how towns used to spontaneously organize to deal with crime. Robbing the baker involves not only a robber and his victim: an attack on one is an attack on the community. The robber has by his very actions chosen to not partake in community — to be an outcast.
Effect of the Welfare StateWhat’s happened over the course of the last century with the rise of the democratic welfare state is that these market-based bonds between people within a community have been severed. With the growing state, more and more people have found positions in the economy and society where they do not need to serve others. In other words, the state has made it possible to live off what other people produce rather than contribute to satisfying everybody’s wants.
As these bonds between people are severed, the threshold to engage in criminal behavior becomes lower. But more importantly, as people do not need to rely on their ability to satisfy the wants of others, they don’t understand other people: they have no incentive to learn about their needs and wants, and they have nothing to gain personally from satisfying them. In other words, there is no interdependence and therefore less of a reason to stay away from destructive behavior.
This is exactly what we’ve seen over the course of the past century when the very large state has replaced civil society with centralized systems and market with power. The problem is that when people stop learning about each other, it is easier to resort to conflict rather than cooperation — and it is much easier to see other people as obstructions to your own happiness. Getting rid of them thus increases your share of the (now diminishing) pie, and using and exploiting others for your own benefit appears a means toward satisfaction of one’s own wants.
We increasingly see examples of this type of thinking among entrepreneurs and those who want to be entrepreneurs. They start businesses not as a means to make a living — that is, to indirectly benefit themselves according to the Law of Markets — but in order to do “what they like.” It’s a lifestyle choice that many seem to think they have a “right” to make. Even worse, sometimes they even blame their entrepreneurial failure on “society” for not being supportive enough and not appreciating what they’re offering at the price they’re demanding.
This is exactly backward: to be able to do what you like for a living is a privilege that you can enjoy only if you, by doing so, satisfy others. If you create value for others, you gain value for yourself.
In this type of society where the bonds between people are weakening, it is not strange that people find the idea of a decentralized, spontaneous order outrageously naïve. Competition is here not the sound striving to better serve others by trying different and differentiated ways of satisfying wants, but rather a zero-sum game where there are winners and losers. In this situation, whoever is willing to cut corners, lie, and deceive is immediately better off. The incentives, in other words, are for destroying value and to prioritize short-term gains even if they come at high long-term costs — because those costs may be another’s burden. It’s the very opposite of civilization and an existence that will, if left unchecked and unchanged, eventually degenerate into a Lord of the Flies-type tribalism.
It is not strange that people have a hard time understanding the harmony argument for markets in a time when the state has alienated them from productive interdependence as explained by Say’s Law. The market’s informal, spontaneous cooperation for mutual benefit has been replaced by a statist mindset, which seeks guarantees — and finds it only in formal power.
But it should be obvious from the discussion above that this is not in any sense a guarantee — especially against bad behavior. It is the opposite. Yet it should be recognized that the market also offers no guarantee, strictly speaking. But do we need one when people’s interests are aligned? All we need to trust is that people do what is good for themselves. That’s hardly naïve.
The United States jobs recovery slowed down slightly in September, but the employment recovery is still faster than in most comparable economies. The jobs report showed a healthy 661,000 gain in nonfarm payrolls last month. Much of the difference with consensus came from shifts in government payrolls, which fell 216,000 in September. However, private payrolls rose by a healthy 877,000. This means that unemployment may have fallen below the 8.1 percent level in September.
In Europe, according to Eurostat, the unemployment rate increased to 7.4 percent in August, while in the euro area it rose to 8.1 percent. However, more than 10 million workers remain in furloughed jobs, making the comparison with the United States, which does not have that scheme of subsidized unemployment, a challenge.
In similar terms, the eurozone unemployment would be close to 11 percent if we used the same calculation as the United States. The Organisation for Economic Co-operation and Development (OECD) estimates that unemployment will rise above 10 percent in the eurozone before year-end as furlough schemes end.
Eurostat said it estimates that over 15.6 million people in the EU and around 13.2 million in the euro area were unemployed in August. Compared with July, the number of unemployed increased by 238,000 in the EU and 251,000 in the euro area.
The furloughed jobs schemes have been one of the most important policies implemented by the European nations in the covid-19 crisis. They aim to protect jobs for a few months while businesses recover their activity. These schemes were designed to allow companies to pass what was expected to be a short and almost painless crisis of two, maybe three months. Now many European nations face a double problem. Many of the companies that signed on for these furloughed job schemes face bankruptcy, as the economic crisis has been longer and more damaging to the business fabric than governments expected. With almost one in five companies in Europe facing substantial losses and many close to bankruptcy, a significant part of these furloughed jobs will simply become full unemployment. In Germany, an economy that has recovered faster than all its European peers, around 1 million workers remained in these subsidized schemes after almost six months since reopening the economy.
In Germany, the government has also implemented a “bailout of everything” policy to keep the zombie businesses alive. According to the Financial Times, almost five hundred thousand businesses in Germany can be considered zombies (unable to pay their interest expenses with operating profits). If the crisis remains for more months, as it seems will happen, the cost of furloughed jobs will be unbearable for governments and the employment drama will unravel just at the time when the insolvency issues start to appear in banks and companies.
Furloughed job schemes only work as a temporary measure if strong policies to protect the business fabric and strengthen the private economy are implemented at the same time. Unfortunately, many governments in Europe such as Spain, where unemployment is 16.2 percent even without counting furlough schemes, have only used these programs to “hide” unemployment and no significant measure has been implemented to help businesses thrive, attract capital, or strengthen job creation.
Many problems remain in Europe. The cost of creating a job is extremely high, with a high tax wedge on labor. Additionally, few of the tax and administrative burdens to business creation have been lifted in this crisis. Finally, in many cases, populist governments have threatened investment and job creation instead of incentivizing capital attraction.
The European economy will find itself in a lost decade for employment if these burdens are not lifted. Furlough schemes may have worked as a short-term disguise of the employment drama, but the crisis may be worse if countries don’t implement decisive labor market liberalization measures and strong tax incentives to rebuild and grow the business fabric.
Democratic presidential candidates from centrists like former Colorado Governor John Hickenlooper to progressive champion Bernie Sanders have come to a consensus on the issue of a $15 minimum wage.
Meanwhile, Alexandria Ocasio-Cortez has declared, “Any job that pays $2.13 an hour is not a job, it’s indentured servitude.” She is referring to how the federal minimum wage for tipped workers is $2.13. This is part of AOC’s shtick about Americans having “dignified” jobs which require the government to step in and set payment standards.
The $15 minimum wage has received an extra boost after the U.S House voted for the Raise the Wage Act, which would establish the $15 wage at the federal level. Although this bill will likely be killed in the Republican-controlled Senate, the bill's passage in the House keeps it in the news.
Increased Minimum Wage is Already Taking Its Toll in Certain States With all the chatter about a $15 minimum wage, it would be a mistake to believe this policy is just a crazy, political thought experiment. The $15 minimum wage is no longer a theoretical proposal that is confined to discussions in progressive circles. It’s actually being implemented in real time.
States such as New York and California — well-known staging grounds for progressive policies — have implemented their own “living wage” policies. Andrew Rigie, the Executive Director of the New York City Hospitality Alliance, observed that “full-service restaurants recorded a 1.6 percent job loss, which is the first recorded annual loss in two decades” in 2018 alone. With the $15 statewide minimum wage policy going into effect last year on Dec. 31, 2018, more job loss is expected. According to the Hospitality Alliance’s survey, “A total of 76.5 percent of full-service restaurant respondents reduced employee hours, and 36 percent eliminated jobs in 2018.”
Similarly, California’s minimum wage policies are already garnering noticeable attention for its troubling results. An interesting caveat of California’s policies is that its policy won’t be a full-blown “living wage” of $15 per hour until 2022. Nevertheless, the data paint a bleak future for California’s projected wage hikes. According to a recent study from the University of California Riverside, the new minimum wage mandate is already beginning to take its toll on the restaurant sector.
The data suggest that while the restaurant sector in California has grown as the minimum wage increased, employment in the restaurant industry has grown slower than it would have without the minimum wage increases. The study found that “there would be 30,000 fewer jobs in the industry from 2017 - 2022 as a result of the higher minimum wage.”
Further, the study uncovered that the minimum wage’s impact was “greater in lower income communities than higher income communities” due to how restaurants in high income areas “can pass on the additional costs to customers more easily.”
The study concluded by demonstrating yet again that the most vulnerable and least-skilled were negatively impacted by this government-imposed wage hike: “Specifically, we see a decline in the employment share of low-skilled workers, disabled workers and part-time workers in the sector.”
On July 17, 2019, the economic realities of a $15 minimum wage policy surfaced again when Restaurants Unlimited filed for Chapter 11 bankruptcy. In a statement, the company cited the progressive minimum wage as the main reason for the company shutting down. The company owns 35 high-end restaurants mostly located on the West Coast, which includes seven in Seattle.
In its filing, Restaurants Unlimited declared, “Over the last three years, the company’s profitability has been significantly impacted by progressive wage laws along the Pacific coast…the result was to increase the company’s annual wage expenses by an aggregate of $10.6 million.”
In the same bankruptcy statement, it detailed three examples of cities where minimum wages were raised during the last few years. Portland currently has a $12.50 minimum wage policy, while San Francisco’s minimum wage increased by 41 percent to $15.59 per hour. Seattle, America’s first city with a $15 minimum wage, now mandates large employers to pay at least $16 hourly.
Corporate Wage Increases: A Different Animal? Even Whole Foods is witnessing negative effects from its new internal minimum wage policy which mandates a $15 minimum wage for employees. The result has been increased layoffs and reduced work hours for employees. Although this case deals with a private company pursuing its own policies, it shows that virtue signaling for higher wages does not always translate into good business policy. At least, this is a decision made that is only confined to Whole Foods and it is not a one-size-fits all policy that all businesses — small, medium, or big — are forced to follow by law.
Minimum Wage Laws Violate Basic Economics Mark Hendrickson points out an inconvenient truth about how minimum wage laws, “have existed without interruption since the federal Fair Labor Standards Act of 1938” which has made the American populace accustomed to their existence. Whenever a new minimum wage hike is proposed, most people take these hikes almost as a given, while completely ignoring the repeated sets of negative consequences that accompany these laws — higher unemployment among lower-skilled workers, reduced work hours, and companies turning to automation to adjust to these arbitrary laws.
There’s a special kind of arrogance behind minimum wage policies. It assumes that politicians or bureaucrats can determine wage prices, and not the market. This fatal conceit, as F.A. Hayek might say, leads to subversion of the pricing mechanism and creates distortions in the markets as evidenced by the resultant unemployment.
Hendrickson is also correct in pointing out that higher productivity of labor and increased demand for labor are the principal factors behind increasing the purchasing power of wage earners. In the eternal quest of having governments “do something,” demagogic politicians ignore these crucial ingredients to wage growth.
Political myopia is at the center of the minimum wage debate. There is simply no time to look at real solutions, which require rigorous research and a political will to carry out reforms that may not sit well with the voting public. This is what is needed to correct the many errors that the present-day managerial state has created from income taxation to ever-expanding bureaucracy .
However, in today’s world of legislation as a solution to every problem, options to genuinely downsize the state are always overlooked. If people want higher living standards and more “dignified” wages they should shift their focus towards wholesale de-regulation at all levels of government.
Economic prosperity cannot be created via legislative fiat.
In the past two hundred years, technology has transformed the human environment more than in the thousand years before. Until 1840, more than 70 percent of the American work force were employed in agriculture, now it is less than 2 percent. The freed labor found employment first in the manufacturing sector and then in services. Now, with robotization, the speed of substituting labor through machines will accelerate and artificial intelligence will increasingly substitute labor in the service sector.
Even sophisticated jobs will not offer employment security. A college degree is no longer the entrance ticket to high earnings. Yet the new technologies contain also the solution to the problem. While technological progress destroys occupations, innovations make the economy more productive. Wealth, rightly understood, is productivity. A rising productivity means that less labor is needed to produce the same amount of goods. The higher the productivity rises, the richer we get.
The current trend in the stock of robotics indicates the future growth of wealth (Figure 1).
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Figure 1. World-wide stock of robotics in thousands of units. Source: International Federation of Robotics (IFR) 2018 The Real Threat The problem that we face is not the threat of unemployment. The real problem is that social resistance against the loss of certain jobs may emerge and an anti-capitalist mindset may prevail and hamper economic progress.
But in a free society, robotization is not a threat but a boon. A better future does not only require the continuation of robotization, there must also be a parallel move to free capitalism.
In the societies that are confronted with a growing share of older people, widespread robotization is the way out of the public pension dilemma. For emerging economies, robotization is the way to overcome poverty more rapidly. For humankind as a whole, the robotization of the economy paves the way to lead less burdensome lives and to gain a high standard of living (Figure 2).
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Figure 2. Number of installed industrial robots per 10,000 employees in the manufacturing industry in 2017. Source: International Federation of Robotics (IFR) 2018 Jobs are just more toil and labor, and are not the key to a better future. Higher productivity is the key. Robotization provides the same deliverance from tedious work as the mechanization has done for the drudgery of working on the farms and in the factories. At the same time, robotization (as with all previous forms of mechanization) will further reduce the cost of basic necessities like food, clothing, and shelter. Our present prosperity is the result of the use of machines that came with capitalism (see Figure 3).
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Figure 3. Gross domestic product per capita (international dollars in 2011 prices). Source: Our World in Data Reducing the Perceived Need for a State The great benefit that the new technological tools potentially offer is not only to deliver us from toil and unpleasant labor, but also from politics. By greatly reducing the cost of basic goods and services, the new technologies can make the political apparatus obsolete and allow the privatization of the functions of government, of the public administration, and of the judicial system. In a world with highly automated production, and without a state in the conventional sense, the cost of living would be only a fraction of that of today and obligatory contributions would take only a negligible part of income.
With the dissolution of the state apparatus, a colossal financial burden would fall from the shoulders of the common man. Free capitalism together with the drastic reduction of the state and the abolition of politics would do away with the financial burdens that afflict the modern citizen.
An anarcho-capitalist order would open the way for the new technologies to do away with the avalanche of public policies and regulations and thus eliminate the present system, which is so inefficient, corrupt, unjust, and which is in its essence also undemocratic. No state intervention in economic life will lead to prosperity. The path to affluence is the withdrawal of the state and the end of politics.
Robotization vs. Social Democracy In a free economy, productivity would rise so high that the purchasing power of the salaries would do away with the anxieties about job security and paying the bills for basic needs.Free capitalism guarantees not only rising incomes, it is also the means to hold tyranny in check which, after all, may be even more important than material progress. This vision of an anarcho-capitalist order with a highly productive economy and a stateless society stands in stark contrast to the contemporary social-democratic, "liberal" system of governance which marches on to more government spending, more public debt, and more regulation, lower productivity, and less purchasing power.
The inner workings of the present social-democratic system lead to higher taxes and more contributions. Public debt continues to rise. The endpoint of the existing system of party democracy, social welfare, and state capitalism is not stability, wealth, and liberty but state bankruptcy, misery, and suppression.
The dominant policy agenda in most modern democracies asserts that government could prevent and cure unemployment, economic crises, recessions, depressions, inflation, deflation, and inequality and that the state could provide education, healthcare, and social security for all. The promises of rising incomes and employment dominate the political campaigns.
The traditional policies have not worked, and they will even less so function in the new millennium. The answer to the challenge is not more of the old.
In order to avoid a new totalitarianism, the answer is more free capitalism and fewer politics. Such a libertarian order would do away with party politics through a system called "demarchy" or "sortition," which has the legislative body selected by lottery. A political system free of party politics together with a market-based monetary order and the private provision of law and security would minimize and finally abolish the state as a monopolistic organization of dominance.
Britain’s economy had been suffering chronic unemployment for a decade prior to 1936. Economic theory as it was then understood clearly showed that the cause of a market surplus was sellers asking a price in excess of what buyers are willing to pay.
If buyers and sellers simply disagree, then so be it. But if the situation is aggravated by excessive regulation or other institutional problems, then economists would advise dissolving institutional barriers that prevent the smooth functioning of the market price system. Contemporary British economists were aware that labor union contracts fixed wages above market-clearing levels and that unemployment subsidies were a factor in preventing labor markets from clearing.
The revolutionary John Maynard Keynes rejected the orthodox view. In his 1936 book The General Theory of Employment, Interest and Money, he proposed a wholly different approach. While carefully obscured in a sophisticated model, Keynes’s solution was simple: to leave nominal wages alone, but lower real wages through inflation. If business firms understood the difference, then when real wages reached an attractive level, they would begin to hire at the union pay scale.
In his critique of the Keynesian revolution, the British Austrian school economist William H. Hutt made compelling arguments against the use of inflation as a substitute for market prices. Hutt made several arguments for the superiority of sound money over inflation. Here I will look at several of his ideas.
Price Coordination versus Inflation Hutt showed that lowering real wages through inflation is not the same thing as market price adjustments under sound money. Coordination means all producers making the best use of scarce factors to produce more of what consumers want at lower cost. The cost is less production of things that consumers care less about. Coordination requires prices driven by competition among entrepreneurs and scarcity of the factors. A well-functioning price system will bring idle labor and capital goods into use at lower prices, so they may contribute to alleviating scarcity. A lack of price coordination was at fault in the British labor markets.
Better coordination would have required many individual price adjustments, “countless widespread and deliberate acts of coordination.”W.H. Hutt, The Keynesian Episode: A Reassessment (Indianapolis, IN: Liberty Fund, 1980), p. 74. Specific market price changes driven by the profit-seeking and loss-avoidance motives of entrepreneurs was needed. The prices most in need of adjusting were the wages of the unemployed. Each worker could have found work of their own choosing, either accepting the highest available wage, or the best offer they could find in the occupation they preferred.Hutt, Keynesian Episode, p. 80.
The main problem Hutt saw was that unemployed workers were asking for a wage above the point where the market for their services would clear. These wage demands were mostly intermediated through labor unions, who were trying to extract a benefit for their members at the expense of the nonunionized part of the workforce. The public at large in their role as consumers lost out either through higher prices or less supply, if they were willing to pay more. The effect of the union’s demands, if met, would be to drive up costs and prices in their industry and force the remainder of the system to adjust. If the consumer was not willing to cooperate, the unions only succeeded in pricing their membership out of a job.
A wage rate fixed above market clearance in one industry displaced workers into either unemployment or underemployment. If not out of work altogether, workers would be doing something that either paid less or working in an occupation that was not their first-choice line of work.
From a distance, if you squint, it might appear that lowering real wages through inflation achieves approximately the same thing as cutting nominal wages. So long as the prices of the goods that businesses sell and wages remain the same, and if other input costs do not rise any faster than their output prices, then real wages would fall. Business selling prices will rise to the point where it makes sense to hire workers at the wage they are holding out for—without the need for a political confrontation with labor unions.
One of the effects of this type of inflation is that it would lower wages in all sectors and industries where it was not anticipated, or in which there were contracts or other long-term agreements. A free price system would instead result in lower wages for those markets in surplus without collateral damage to other workers.
But as Hutt showed, inflation is not a good substitute for many entrepreneurial actions—each one changing a few specific prices. Compared to price adjustments, inflation is a blunt instrument. Rather than the prices of items in most oversupply falling the most, as would happen with market pricing, under inflation, the least obstructed prices will rise the most. Cantillon effects will dominate. Keynes’s policy of inflation might work to the degree that union wages were the most rigid—both upward and downward. The difficulty of negotiating a new contract and the length of existing contracts locked the nominal prices in those markets.
Asking Prices Must Change Supply and demand both matter. A market stuck in surplus could reach clearance either through an increase in the offering price or a lower asking price. If neither one happens, it means only that buyers and sellers do not agree on the value. Everyone preserves what they have to what they do not. There is no opportunity for a mutually beneficial exchange. A value-free economist cannot say any more.
When markets are stuck in surplus and there are idle resources, Hutt placed the majority of responsibility on the sellers. It was sellers who must ask for less, in his opinion. He used the term “withholding” to describe a seller of labor or capital who will remain idle rather than accept a reasonable offer for their services. Hutt saw the unemployment in Britain as similar to the shopkeeper who stubbornly refuses to mark down inventory of a product that customers no longer care about, long after customers have stopped browsing that aisle of the store.
Hutt’s focus on the seller was based on different positions of the entrepreneur and the unemployed worker. Profit-motivated (and loss-avoiding) businesses in a competitive industry often do not have much scope to increase wages while continuing to make a profit. They are constrained, on the one hand, by their inability to pay more than the marginal value product of labor. At the end of the value chain, this value is set by the customer’s valuation of the product. On the other side, there is the supply of labor willing to work at an offered wage. While some businesses may defer layoffs, and attempt to keep their staff during a short downturn, they will only hire when they expect to see a positive margin between their costs and their selling prices.
Hutt quotes Robert W. Clower’s observation that the quantity of transactions in a market that is not at the market-clearing price is dominated by the “short side” (the seller when there is a shortage and the buyer when there is a surplus).W.H. Hutt, A Rehabilitation of Say’s Law (Athens: Ohio University Press, 1974), loc. 1482, Kindle. This is similar to Murray N. Rothbard’s analysis of the pricing of the inventory of business firms. His discussion relied on the concept of reservation demand, which is the demand that the owner of a good exercises by not selling it for the best offered price. We all have reservation demand for our current property, some money, assets, etc. Rothbard argued that because businesses do not have any use for their inventory other than to sell it, businesses have no reservation demand for inventory that has been produced. At that point, the price is set by buyers only, in relation to a vertical supply curve.Murray N. Rothbard, Man, Economy, and State, with Power and Market, 2d scholar’s ed. (Auburn, AL: Ludwig von Mises Institute, 2009), pp. 138–42.
Unemployed labor, on the other hand, has no particular constraint on the ability to accept a lower wage. Workers have a reservation demand for labor in the form of leisure, but most workers need to have some income. It can make sense for someone who is speculatively unemployed to keep looking rather than accept a low wage if they think that with a bit more looking they can find a better offer. However, Hutt believed that many unemployed workers had an unrealistic view of the labor market, expecting wages to rise for no good reason, or relying on the dole to subsidize idleness. British workers at the time felt that accepting less than what had formerly been the customary wage in their industry (in better times), was a matter of losing face. Unions encouraged emotionalism in associating a particular nominal wage level with human dignity. Unions were aided by the failure of governments to enforce property rights, the threat of strikes, and a body of public opinion and case law in Britain with great respect for labor organization.
Hutt blamed labor unions for creating a political backstop that reinforced the ability of the unemployed to hold out for unreasonable wages. By “unreasonable,” he meant more than the entrepreneur would offer based on the anticipated marginal value product of labor under current business conditions. This value depends on the expected selling prices of the firms’ products. The value received by the employer is in the form of a contribution to the selling price. Under a general depression, selling prices all around are lower, and therefore labor is worth less than in good times.
When labor is unemployed, the unemployed workers’ best option was to accept the wage offer on the table rather than to hold out. During a depression, wages will be lower than they were at the peak of the previous boom, but the growth during the ensuing recovery—which would happen if people would accept the present reality of lower prices—would eventually increase the demand for labor all around. Competition among employers would ensure that wages would rise in line with labor’s marginal value product as sales volumes ramp up.
Only Works When Unanticipated The inflationary “solution” relies on consumer prices rising faster than wages. This can happen, but it is not a sure thing. In Britain, the most troublesome wages were negotiated by unions who had not expected inflation to erode their value. Hard-won union wage agreements, perhaps at the cost of a strike, could not easily be renegotiated. The wage might be nearly impossible to change until the contract had run its course and another cycle of bargaining was concluded. Keynes’s approach assumes that businesses understand the difference between real and nominal wages while workers do not. That may be true once, but after the first round of inflation policy, labor unions will get out in front of the next cycle by demanding that wage indexing be added to their contracts.
At the time a form of the gold standard was still in effect, and memories of the classical gold standard persisted. Inflation had not been tried before as a way to systematically undercut labor unions. To outright suggest inflation as a policy was disgraceful in an age in which the solemn promise of convertibility of the British pound to gold was a moral obligation. This put the element of surprise on the side of the printing press.
If inflation is anticipated, as it came to be, then labor unions can adapt by building cost-of-living adjustments into their contracts. The same could be done with government benefits. As Hutt observed, “Unless this deception is possible, those who are in a position to raise prices and wage rates will do so in advance of the declining value of the money unit so that the original degree of withheld capacity will tend to be perpetuated.”Hutt, Keynesian Episode, pp.122–23. Jacob Viner made a similar point in his critique of Keynes, that Keynesian inflation would lead to “a constant race between the printing press and the business agents of the trade unions.”Henry Hazlitt, ed., The Critics of Keynesian Economics (Irvington-on-Hudson, NY: Foundation for Economic Education, 1995), p. 9.
Inflation Fails to Address the True Problem Inflation was a one-time solution to the problems in Britain in 1936. Inflation not only postponed the necessity of dealing with the real problems but made it more difficult to do so effectively when the time came. Hutt argues that “there is no such easy solution; that a state of discoordination needs coordination.”Hutt, Keynesian Episode, p. 74. Inflation is not a long-term solution to the problem of surplus, because it does not confront, straight on, the real problem: policies that prevent the price system from being flexible. Once people catch on, “the institutional setup which permits the rigidities evaded by the inflation will remain unreformed. Withheld capacity will return.”Hutt, Keynesian Episode, pp.123–24.
Hutt found an antecedent cause in the failure of economists and political leaders who understood the economic problem to educate the public and in so doing build political support for confronting the unions. As Hutt explained, inflation is “a dangerous policy” which “weakened market pressures to the basic adjustments needed,” which were open labor markets and flexible pricing. It constitutes “the buying off” of antisocial price behavior.Hutt, Keynesian Episode, p.129.
Hutt’s forecast proved to be accurate as governments became increasingly addicted to increasing doses of ever and ever less effective rounds of inflation. The failure to make the structural changes led to the “stagflation” of the 1970s. Hayek, writing in 1969 on the prior decades of Keynesian policies, stated,
Now we have an inflation-borne prosperity which depends for its continuation on continued inflation. If prices rise less than expected, then a depressing effect is exerted on the economy. I expected that ten years would suffice to produce increasing difficulty; however, it has taken 25 years to reach the stage where to slow down inflation produces a recession. We now have a tiger by the tail: how long can this inflation continue? If the tiger (of inflation) is freed he will eat us up; yet if he runs faster and faster while we desperately hold on, we are still finished.Friedrich A. von Hayek, A Tiger by the Tail: A 40-Years’ Running Commentary on Keynesianism by Hayek, comp. Sudha R. Shenoy, 3d ed. (1972; n.p.: Institute for Economic Affairs and Ludwig von Mises Institute, 2009), p. 112.
Conclusion As Hutt explains, when stated in simple terms Keynes’s view was entirely consistent with what every economist knew, and therefore noncontroversial. Raising consumer prices while nominal wages are fixed does lower real wages and will clear markets in surplus. Had he said this it would have been noncontroversial and would not have required a revolution.
“Keynes,” wrote Hutt “would be ashamed to hold, as the ‘[monetary] cranks’ in effect did, that merely to dole out additional money is the cure for unemployment. Yet are not the identical ideas in all their navieté at the root of Keynes’ teachings, obscured in a mass of impressive but conceptually unsatisfactory theoretical paraphernalia?”Hutt, Keynesian Episode, p. 232. Even advocates concede that The General Theory is poorly written and difficult to understand. The necessity of burying the policy in deep layers of obscurity came about because inflation was considered a shameful thing. Unlike in our current time, it could not be advocated openly. Yet no matter how deeply hidden, Hutt surfaced the truth that inflation does poorly what the price system does well.
[Newsweek column from May 26, 1952, and reprinted in Business Tides: The Newsweek Era of Henry Hazlitt.]
At his press conference on May 8, Mr. Truman, asked whether the chief danger was inflation or deflation, replied that the country had to guard against both: and that was why it was necessary to have control powers — to prevent either one.
There is nothing new in this Scylla and Charybdis analogy. It runs like a refrain through the speeches of Leon Keyserling and the reports of the Council of Economic Advisers since that body was created. What is significant is Mr. Truman’s own espousal of the doctrine at this time. On top of the hasty removal of restrictions on the use of “strategic” metals, on state and local bond issues, on housing, on real-estate credit, and especially on general installment buying, on top of the violent denunciations by Administration spokesmen of every effort of Congress to economize at any point, this statement makes it unmistakably clear that what the Administration really fears and fights now is any lull in the inflation, any sag in the boom prior to election. In brief, it is prepared to throw all its “anti-inflation” policies into reverse.
It would of course serve Mr. Truman’s political purposes ideally if he could get Congress to swallow this fighting-both-devils-at-once doctrine. He could then continue both to inflate and to “fight” his own inflation. He could step on the accelerator of credit expansion with his right foot while he stepped on the resulting price increases with his left — always saving the country in the nick of time. The politicians of Europe have made a very good thing of this. The result is known there as repressed inflation.
The principal methods by which governments inflate are: (1) huge governmental spending, particularly deficit spending; (2) monetizing the public debt; (3) pegging or forcing down interest rates; (4) ordering wage boosts; and (5) encouraging private credit expansion. The Truman caliphate has resorted to all these methods. The principal methods by which governments pretend to “fight” inflation are by price fixing and wage fixing, usually accompanied by allocations, rationing, and subsidies.
These two sets of powers give a government unanswerable weapons for punishing political opponents (by crushing taxation, price rollbacks, profit cuts, inadequate allocations, seizures) and for rewarding political supporters (by favorable allocations, price or profit increases, wage increases, and subsidies). Through its life-and-death powers over everyone’s economic prospects, it has the power to keep everybody in line.
Politically attractive as such powers are to a ruling clique, they make no sense economically. They imply that a free economy cannot balance itself, but that the DiSalles and Arnalls and Feinsingers know just how to do it. They imply that inflation is some disaster that falls upon a country from the outside, like a flood or a plague of locusts. Inflation is in fact always and everywhere the creation of governmental policy. It is caused by the increase in the supply of money and credit. The way to halt it here is not to give the President “emergency” powers to halt it, but to deprive him of his present power to inflate. That the Administration knows how effective this deprivation would be is evident from its vehement objections whenever any proposal arises in Congress to free the Federal Reserve System from Treasury dominance.
As for price control, it cannot be repeated too often that as a cure for inflation it is completely fraudulent. It not only diverts attention from the real cause and cure of inflation. It adds further evils of its own. It abridges human liberty, encourages waste, and disrupts production.
The course before Congress is clear. It should allow price-control and wage-control powers to lapse completely. It should deprive the Administration of its present power to inflate. And it should repeal the provisions in its labor laws which compel employers to bargain with industrywide labor monopolies and which give those monopolies the power to bring the nation’s production to a halt.
The United States’s jobs recovery is extremely poor, especially if we consider the size of the monetary and fiscal stimulus and the spectacular upgrade to GDP estimates. After a massive consensus increase in GDP recovery estimates to 6.5 percent in 2021, no one should be cheering a 5.9 percent unemployment rate, 58 percent employment-to-population ratio, and, even worse, a 61.6 percent labor force participation rate that has remained stagnant for ten months. Furthermore, Bloomberg Economics shows that the United States unemployment rate would be 8.4 percent excluding the participation decline.
In the European Union, the employment situation is also a cause of concern. The United States’s jobs recovery is certainly strong only when compared with an extremely weak European jobs environment. In May 2021, the euro area’s seasonally adjusted unemployment rate was 7.9 percent, marginally down from 8.1 percent in April 2021. These figures, published by Eurostat, do not include the 6 million furloughed jobs that remain in the European Union. Eurostat estimates that 15.278 million men and women in the EU, of whom 12.792 million are in the euro area, were unemployed in May 2021. Compared with May 2020, unemployment rose by 949,000 in the EU and by 803,000 million in the euro area. Despite a strong recovery in the purchasing managers’ index (PMI), the employment component remains poor. Euro area unemployment rate would be closer to 11 percent including furloughed jobs.
The disappointing jobs recovery should also be analyzed in the context of the largest fiscal and monetary stimulus in decades. No one can seriously consider these job figures as positive in the middle of trillions of dollars of deficit spending and monetary stimulus. The Keynesian so-called miracle of government spending and central bank intervention has failed again.
We must also remember that these figures are happening in the middle of a better-than-expected recovery in the services sector, which tells us that the risk of a jobless recovery that we mentioned a few months ago is even clearer now.
We estimate that the unemployment rate and labor participation rate of 2019 will not be recovered in the United States until 2025 … if there is no financial or economic crisis in the process. Even worse, we believe that almost 30 percent of furloughed jobs in the European Union will not be absorbed even by 2025.
The slow jobs recovery is not something economists should simply ignore or underestimate. An artificial increase in GDP driven by debt and deficit spending and where job creation is so weak is also a recipe for a debt crisis in a stagnant economy where job creation may slow even more.
When the mirage of monetary and fiscal stimulus evaporates, we will likely see a return to the failed low-productivity growth and indebted model that defined the 2010–18 recovery, but with an alarming increase in government size and interventionism. More debt, less growth, and millions of people out of a job due to increased levels of intervention. The hilarious thing is that many will blame the poor recovery on capitalism and neoliberalism when all we are seeing is the result of massive government and public absorption of economic resources.
Listen to the Audio Mises Wire version of this article.
Among the hotly contested list of Joe Biden’s promises is an increase of the federal minimum wage to $15 an hour.
There are plenty of sound reasons to oppose government minimum wage laws, but there is one objection making the rounds that is based on bad economics and should be avoided, and that’s the "businesses will pass on the costs to consumers" objection.
For instance, a now deleted tweet by someone claiming that a $15 minimum hourly wage will cause Taco Bell burritos to explode in cost was shot down in short order by the tweet below. Scrolling through the replies also shows hundreds of other similar responses from people in cities that already have a $15 minimum wage. Indeed, the responses were so decisive and numerous that the original poster deleted his tweet to avoid further embarrassment.
Don’t make the same mistake.
There are two main reasons why the "but tacos or hamburgers at fast food joints will cost $10" argument is easily shot down. First, it is bad economics.
If Taco Bell or McDonalds could charge $10 per taco/burger, they already would be, regardless of wages and the costs of other inputs. But businesses can’t just unilaterally increase their prices without a response from customers. The law of demand tells us that consumers will demand more of a good at lower prices and less of it at higher prices, other things held equal. Taco Bell doesn’t charge $10 for a burrito, because customers won’t pay that price.
To illustrate this point, imagine if the government mandated a minimum price for beef of $15 per pound. Burger joints couldn’t just pass on the increased costs to customers, because the demand curve for burgers would not change. Instead, burger joints would buy less beef.
The mandated increase in beef prices would do nothing to improve the quality of the beef nor change the price customers are willing to pay for the finished product it’s used to make. To the extent that burger joints would still buy beef; they would need to cut costs elsewhere, on other inputs and expenses.
Fast-food restaurants would decrease their demand for beef and seek alternatives, maybe instead sell more chicken sandwiches or salads.
Some larger national chains might be able to absorb the added costs of beef by dispersing the spending cuts across many other inputs and across thousands of stores, so it would be smaller mom-and-pop shops that would be hit the hardest.
Now swap "low-skilled labor" for "beef." Businesses can’t just "pass along" the higher input costs to customers. Government’s artificial raising of the price of an input will decrease the demand for that input, meaning that fewer low-skilled workers will have access to the important first rung of the career ladder.
Businesses will instead seek alternatives, like automated kiosks, that are more economical. Moreover, to the extent that businesses pay the increased minimum wage to employees that can’t be replaced, they will be forced to cut costs elsewhere, perhaps reducing fringe benefits, worker training programs, or even investments in workplace safety.
Moreover, warning against price increases in fast food or other goods provided by minimum wage workers misses the mark and exposes one to easy refutation. Changes in the costs of inputs, whether labor, raw materials, durable capital goods, or anything else, do not change the demand curve for the finished good for which they are used. So when minimum wages are increased, the change will not be reflected in noticeable price increases, allowing minimum wage advocates to say "see, we raised the minimum wage and McDonald’s hamburgers still only cost a couple bucks."
Secondly, not only can your argument be easily dismissed on economic grounds, to the extent that minimum wage advocates accept the faulty notion that increased minimum wages will cause the prices of fast food and other low-priced goods to increase, but they can readily respond by saying they will happily pay a few cents more for a cheeseburger if it means the workers are paid a respectable wage.
Instead, we need to focus on the negative consequences of minimum wages on vulnerable, low-skilled workers, especially minorities. Follow the Horton rule: "Attack the right from the right, and the left from the left."
In the case of the minimum wage, we can address how, as Thomas Sowell has repeatedly pointed out, minimum wage laws have been a "disaster" for young and poor black people.
Not only is focusing on the negative impact minimum wage laws have on low-skilled, especially minority, people more economically accurate, it also makes for a much harder argument for progressives to counter. Minimum wage laws end up disproportionately harming the very people its advocates claim to be helping.
Like so many other harmful state interventions, minimum wage laws need to be fought and repealed. To be successful, however, opponents must avoid falling into weak and easily refutable arguments.
Originally published by the Libertarian Institute.
While Adam Smith originated the doctrine that profits are a deduction from what is naturally and rightfully wages, Marx carried that doctrine to its ultimate limit, in the claim that the greed of the capitalists drives them to deduct so much from what rightfully belongs to the wage earners that the latter are left only with minimum subsistence. This is Marx’s version of the so-called “iron law of wages.” Its essential claim is that employers have the power arbitrarily to set wages at minimum subsistence, irrespective of the state of capital accumulation, technology, and the productivity of labor.In contrast to Marx, the “iron law of wages” propounded by the classical economists was not based on any claim of an arbitrary power of employers to set wages at minimum subsistence. Wages at minimum subsistence was held to be the result of population growth, which, to feed the larger number of people, would require resort to the cultivation of progressively inferior lands and the more intensive cultivation of lands already under cultivation, either of which would result in a falling output of agricultural commodities relative to the number of workers. The same was held to be true in mining. This was held to reduce the buying power of wages as population increased and would go on until real wages were so low that workers could not afford to raise more children than were sufficient to prevent depopulation. This belief was descriptive of events prior to the nineteenth century, and from the perspective of the early nineteenth century appeared to be proved by economic history. Even so, Ricardo, the greatest of the classical economists could observe in 1821 that the operation of this “law” could be counteracted by continued capital accumulation. (David Ricardo, Principles of Political Economy and Taxation, 3d ed. (London, 1821), chap. V.)
What makes Marx’s doctrine of the alleged arbitrary power of employers over wages appear plausible is that there are two obvious facts which do not actually support it but which appear to support it. These facts can be described as “worker need” and “employer greed.”
The average worker must work in order to live, and he must find work fairly quickly, because his savings cannot sustain him for long. And if necessary—if he had no alternative—he would be willing to work for as little as minimum physical subsistence. At the same time, self-interest makes employers, like any other buyers, prefer to pay less rather than more—to pay lower wages rather than higher wages. People put these two facts together and conclude that if employers were free, wages would be driven down by the force of the employers’ self-interest—as though by a giant plunger pushing down in an empty cylinder—and that no resistance to the fall in wages would be encountered until the point of minimum subsistence was reached. At that point, it is held, workers would refuse to work because starvation without the strain of labor would be preferable to starvation with the strain of labor. Thus, if the capitalist is to find workers, he must pay them at least minimum subsistence and no less.
What must be realized is that while it is true that workers would be willing to work for minimum subsistence if necessary and that self-interest makes employers prefer to pay less rather than more, both of these facts are irrelevant to the wages the workers actually have to accept in the labor market.
Let us start with “worker need.” To understand why a worker’s willingness to work for subsistence if necessary is irrelevant to the wages he actually has to work for, consider the case of the owner of a late-model car who decides to accept a job offer, and to live, in the heart of New York City. If this car owner cannot afford several hundred dollars a month to pay the cost of keeping his car in a garage, and if he cannot devote several prime working hours every week to driving around, hunting for places to park his car on the street, he will be willing, if he can find no better offer, to give his car away for free—indeed, to pay someone to come and take it off his hands. Yet the fact that he is willing to do this is absolutely irrelevant to the price he actually must accept for his car. That price is determined on the basis of the utility and scarcity of used cars—by the demand for and supply of such cars. Indeed, so long as the number of used cars offered for sale remained the same, and the demand for used cars remained the same, it would not matter even if every seller of such a car were willing to give his car away for free, or willing even to pay to have it taken off his hands. None of them would have to accept a zero or negative price or any price that is significantly different from the price he presently can receive.
This point is illustrated in terms of the simple supply and demand diagram presented in Figure 1. On the vertical axis, I depict the price of used cars, designated by P. On the horizontal axis, I depict the quantity of used cars, designated by Q, that sellers are prepared to sell and the buyers to buy at any given price. The willingness of sellers to sell some definite, given quantity of used cars at any price from zero on up (or, indeed, from less than zero by the cost of having the cars taken off their hands) is depicted by a vertical line drawn through that quantity. The vertical line SS denotes the fact that sellers are willing to sell the specific quantity A of used cars at any price from something less than zero on up to as much as they can get for their cars.
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The fact that the sellers are willing to sell for zero or a negative price has nothing whatever to do with the actual price they receive, which in this case is the very positive price P1. The actual price they receive in a case of this kind is determined by the limitation of the supply of used cars, together with the demand for used cars. In Figure 1, it is determined at point E, which represents the intersection of the vertical supply line with the downward sloping demand line.The convention in economics is to talk of supply and demand “curves” and to refer even to straight lines as “curves.”
The price that corresponds to that juncture of supply and demand is P1. The fact that the sellers are all willing if necessary to accept a price less than P1 is, as I say, simply irrelevant to the price they actually must accept. The price the sellers receive in a case of this kind is not determined by the terms on which they are willing to sell. Rather, it is determined by the competition of the buyers for the limited supply offered for sale. This, of course, is the kind of case that the great Austrian-school economist Böhm-Bawerk had in mind when he declared that “price is actually limited and determined by the valuations on the part of the buyers exclusively.”See Eugen von Böhm-Bawerk, Capital and Interest, 3 vols., trans. George D. Huncke and Hans F. Sennholz (South Holland,Ill.: Libertarian Press, 1959), 2:245. See also Capitalism, pp. 162–163
Essentially the same diagram, Figure 2, depicts the case of labor. Instead of showing price on the vertical axis, I show wages, designated by W. Instead of the supply line being vertical to the point of the sellers being willing to pay to have their good taken off their hands, I assume that no supply whatever is offered below the point of “minimum subsistence,” M. This is depicted by a horizontal line drawn from M and parallel to the horizontal axis. Thus, the supply “curve” in this case has a horizontal portion at “minimum subsistence” before becoming vertical. These are the only differences between Figures 1 and 2.
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Figure 2 makes clear that the fact that the workers are willing to work for as little as minimum subsistence is no more relevant to the wages they actually have to accept than was the fact in the previous example that the sellers of used cars were willing to give them away for free or pay to have them taken off their hands. For even though the workers are willing to work for as little as minimum subsistence, the wage they actually obtain in the conditions of the market is the incomparably higher wage W1, which is shown by the intersection—once again at point E—of the demand for labor with the limited supply of labor,noted by point A on the horizontal axis. Exactly like the value of used cars, or anything else that exists in a given, limited supply, the value of labor is determined on a foundation of its utility and scarcity, by demand and supply—more specifically, by the competition of buyers for the limited supply—not by any form of cost of production, least of all by any “cost of production of labor.”
It also quickly becomes clear that “employer greed” is fully as irrelevant to the determination of wage rates as “worker need.” This becomes apparent as soon as the case of the art auction is considered that I originally presented in CapitalismSee Capitalism, p. 204. in order to demonstrate the actual self-interest of buyers. There I assumed that there are two people at an art auction, both of whom want the same painting. One of these people, let us now call him Mr. Smith, is willing and able to bid as high as $2,000 for the painting. The other, let us now call him Mr. Jones, is willing and able to go no higher than $1,000. Of course, Mr. Smith does not want to spend $2,000 for the painting. This figure is merely the limit of how high he will go if he has to. He would much prefer to obtain the painting for only $200, or better still, for only $20, or, best of all, for nothing at all. What we must consider here is precisely how low a bid Mr. Smith’s rational self-interest allows him to persist in. Would it, for example, actually be to Mr. Smith’s self-interest to persist in a bid of only $20, or $200?
It should be obvious that the answer to this question is decidedly no! This is because if Mr. Smith persists in such a low bid, the effect will be that he loses the painting to Mr. Jones, who is willing and able to bid more than $20 and more than $200. In fact, in the conditions of this case, Mr. Smith must lose the painting to the higher bidding of Mr. Jones, if he persists in bidding any sum under $1,000! If Mr. Smith is to obtain the painting, the conditions of the case require him to bid more than $1,000, because that is the sum required to exceed the maximum potential bid of Mr. Jones.
This case contains the fundamental principle that names the actual self-interest of buyers. That principle is that a buyer rationally desires to pay not the lowest price he would like or can imagine, but the lowest price that is simultaneously too high for any other potential buyer of the good, who would otherwise obtain the good in his place. Here that minimum price is $1,001.
This identical principle, of course, applies to the determination of wage rates. The only difference between the labor market and the auction of a painting is the number of units involved. Instead of one painting with two potential buyers for it, there are many millions of workers who must sell their services, together with potential employers of all those workers and of untold millions more workers. This is because just as in the example of the art auction, the essential fact that is present in the labor market is that the potential quantity demanded exceeds the supply available. The potential quantity of labor demanded always far exceeds the quantity of labor that the workers are able, let alone willing, to perform.
For labor, it should be realized, is scarce. It is the most fundamentally useful and scarce thing in the economic system: virtually everything else that is useful is its product and is limited in supply only by virtue of our lack of ability or willingness to expend more labor to produce a larger quantity of it. (This, of course, includes raw materials, which can almost always be produced in larger quantity by devoting more labor to the more intensive exploitation of land and mineral deposits that are already used in production, or by devoting labor to the exploitation of land and mineral deposits that are known but not presently exploited.)See ibid., p. 59 and pp. 63–70.
For all practical purposes there is no limit to our need and desire for goods or, therefore, for the performance of the labor required to produce them. In having, for example, a need and desire to be able to spend incomes five or ten times the incomes we presently spend, we have an implicit need and desire for the performance of five or ten times the labor we presently perform, for that is what would be required in the present state of technology and the productivity of labor to supply us with such increases in the supply of goods. Moreover, almost all of us would welcome the full-time personal services of at least several other people. Thus, on both grounds labor is scarce, for the maximum amount of labor available to satisfy the needs and desires of the average member of the economic system can never exceed the labor of just one person. Indeed, in actual practice, it falls far short of that amount, because of the existence of large numbers of people, such as infants, small children, the elderly, and the sick, who are unable to work.
The consequence of the scarcity of labor is that wage rates in a free market can fall no lower than corresponds to the point of full employment . At that point the scarcity of labor is felt, and any further fall in wage rates would be against the self-interests of employers, because then a labor shortage would exist. Thus, if somehow wage rates did fall below the point corresponding to full employment, it would be to the self-interest of employers to bid them back up again.Full employment, it should be realized, is consistent with many workers voluntarily choosing to remain unemployed while they search for particular job opportunities. In addition, full employment need not mean full employment throughout the economic system. The principle applies occupation by occupation, location by location. Thus, for example, the wage rates of house painters in Indianapolis cannot fall below the point of full employment of house painters in Indianapolis, irrespective of the state of employment in other locations or occupations.
These facts can be shown in the same supply and demand diagram I used to show the irrelevance to wage determination of workers being willing to work for subsistence. Thus, Figure 3 shows that if wage rates were below their market equilibrium of W1, which takes place at the point of full employment, denoted by E—if, for example, they were at the lower level of W2—a labor shortage would exist. The quantity of labor demanded at the wage rate of W2 is B. But the quantity of labor available—whose employment constitutes full employment—is the smaller amount A. Thus, at the lower wage, the quantity of labor demanded exceeds the supply available by the horizontal distance AB.
The shortage exists because the lower wage of W2 enables employers to afford labor who would not have been able to afford it at the wage of W1, or it enables employers who would have been able to afford some labor at the wage of W1 to now afford a larger quantity of labor. To whatever extent such employers employ labor that they otherwise could not have employed, that much less labor remains to be employed by other employers, who are willing and able to pay the higher wage of W1.
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At the artificially low wage of W2 the quantity AB of labor is employed by employers who otherwise could not have afforded to employ that labor. The effect of this is to leave an equivalently reduced quantity of labor available for those employers who could have afforded the market wage of W1. The labor available to those employers is reduced by AC, which is precisely equal to AB. This is the inescapable result of the existence of a given quantity of labor and some of it being taken off the market by some employers at the expense of other employers. What the one set gains, the other must lose. Thus, because the wage is W2 rather than W1, the employers who could have afforded the market wage of W1 and obtained the full quantity of labor A are now able to employ only the smaller quantity of labor C, because labor has been taken off the market by employers who depend on the artificially low wage of W2.
The employers who could have afforded the market wage of W1 are in identically the same position as the bidder at the art auction who is about to see the painting he wants go to another bidder not able or willing to pay as much. The way to think of the situation is that there are two groups of bidders for quantity AB of labor: those willing and able to pay the market wage ofW1, or an even higher wage—one as high as W3—and those willing and able to pay only a wage that is below W1—a wage that must be as low as W2. In Figure 3, the position of these two groups is indicated by two zones on the demand line (or demand “curve”): an upper zone HE and a lower zone EL. The wage of W1 is required for the employers in the upper zone to be able to outbid the employers in the lower zone.
The question is: Is it to the rational self-interest of the employers willing and able to pay a wage of W1, or higher, to lose the labor they want to other employers not able or willing to pay a wage as high as W1? The obvious answer is no. And the consequence is that if, somehow, the wage were to fall below W1, the self-interest of employers who are willing and able to pay W1 or more, and who stood to lose some of their workers if they did not do so, would lead them to bid wage rates back up to W1. The rational self-interest of employers, like the rational self-interest of any other buyers, does not lead them to pay the lowest wage (price) they can imagine or desire, but the lowest wage that is simultaneously too high for other potential employers of the same labor who are not able or willing to pay as much and who would otherwise be enabled to employ that labor in their place.
The principle that it is against the self-interest of employers to allow wage rates to fall to the point of creating a labor shortage is illustrated by the conditions which prevail when the government imposes such a shortage by virtue of a policy of price and wage controls. In such conditions, employers actually conspire with the wage earners to evade the controls and to raise wage rates. They do so by such means as awarding artificial promotions, which allow them to pay higher wages within the framework of the wage controls.
The payment of higher wages in the face of a labor shortage is to the self-interest of employers because it is the necessary means of gaining and keeping the labor they want to employ. In overbidding the competition of other potential employers for labor, it attracts workers to come to work for them and it removes any incentive for their present workers to leave their employ. This is because it eliminates the artificial demand for labor by the employers who depend on a below-market wage in order to be able to afford labor. It is, as I say, identically the same in principle as the bidder who wants the painting at an auction raising his bid to prevent the loss of the painting to another bidder not able or willing to pay as much. The higher bid is to his self-interest because it knocks out the competition. In the conditions of a labor shortage, which necessarily materializes if wage rates go below the point corresponding to full employment, the payment of higher wages provides exactly the same benefit to employers.
The National Labor Relations Act (NLRA) brought about a monumental change in American labor relations by overriding the role of courts. Prior to Congress enacting the NLRA in 1935, unions had a hard time organizing because courts were generally opposed to union activity and saw it as a violation of an employer’s property rights.
Conspiracy, Injunctions, and Antitrust Before the 1935 NLRA, criminal conspiracy charges were sometimes brought against unions, as judges considered collective action both unlawful and harmful to society (see Commonwealth v. Pullis, 1806). Courts also issued labor injunctions as a means to end strikes. A famous case is that of Vegelahn v. Guntner (Mass. 1896), where the court held that picketing is intrinsically intimidating and coercive and could therefore be enjoined. The Court here followed the argument of Commonwealth v. Hunt (Mass. 1842) that while combination and agreement to strike were not per se criminal, a union must pursue lawful ends by lawful means. (Oliver Wendell Holmes famously dissented in Vegelahn.)
Courts then began enforcing antitrust law against labor unions, holding that the Sherman Act of 1890 prohibited secondary activity of unions (where unions would instigate boycotts against a party other than their primary employer). The Supreme Court approved this application of antitrust law in the Danbury Hatters’ case, Loewe v. Lawlor (1908).
The Clayton Act of 1914 attempted to restrict the application of antitrust law to union activity by limiting the use of labor injunctions. However, the Supreme Court still construed the Clayton Act unfavorably toward unions in Duplex Printing Press Co. v. Deering (1921), reading the Clayton Act’s protections narrowly and integrating the common law “lawful ends-means” test into antitrust.
Early Labor Legislation Labor unions did not gain strength in America until after the prosperous 1880s in what is known as the “Progressive Era.” Seeing that courts were a major barrier to union activity, labor unions knew they needed legislation in their favor. The first attempt at such legislation was the Erdman Act of 1898, which facilitated unionization in the railroad industry. However, the part of the act that prohibited discrimination against union members was struck down by the Supreme Court in Adair v. U.S. (1908). Congress eventually enacted the Railway Labor Act of 1926 to govern unions in the railroad and airline industries.
The Norris-LaGuardia Act of 1932 was the first piece of legislation with broader unionization in mind. It prohibited federal courts from issuing injunctions in most “labor disputes,” and it made “yellow dog” contracts unenforceable in court. (These were contracts that employers required employees to sign, agreeing that they would not join a union. Employers used “yellow dog” contracts because violations allowed the employer to get a court injunction against the union.) However, court injunctions were not as commonly used during this period as is often claimed, as historian Thomas E. Woods explains:
Labor economist Sylvester Petro undertook a thorough study of the period from 1880 to 1932 and found injunctions to be exceedingly rare: federal injunctions were issued in not even one percent of all work stoppages, while state injunctions were issued in less than two percent of all work stoppages. And these few injunctions were issued not to thwart labor union activity per se but to put a stop to violence against persons and property. Now even this protection of the employer’s rights — yes, employers have rights, too — would henceforth be absent.
The Norris-LaGuardia Act also provided an exemption to labor unions under the Sherman Antitrust Act of 1890, but this was still not the pro-union legislation that many were hoping for. Congress attempted to pass such legislation in 1933 with the National Industrial Recovery Act (NIRA). However, the Supreme Court struck down the NIRA in Schechter Poultry v. U.S. (1935), holding that this was an unconstitutional delegation of power to the president and a violation of congressional power under the Commerce Clause.
The National Labor Relations Act of 1935 Congress then passed the National Labor Relations Act (also known as the Wagner Act) in 1935. The Supreme Court upheld this new labor legislation as “constitutional” in NLRB v. Jones & Laughlin Steel Corp. (1937), holding that Congress can regulate any activity that has a significant effect, even if indirect, on interstate commerce.
This case was decided in April 1937, only two months after President Franklin Delano Roosevelt threatened to expand the Court in an attempt to get his legislation rubber-stamped. However, in March of 1937, the two swing-vote justices, Owen Roberts and Charles Evans Hughes, began siding with the liberals in permitting the president’s New Deal legislation (including the NLRA and the Social Security Act). This shift prevented the need for FDR’s court-packing scheme, a move that is known as “the switch in time that saved nine.”
The stated purpose of the NLRA was to “promote industrial peace” (among private sector, not public sector unions). It attempted to do this by protecting employee rights to form unions (section 7) and prohibiting “unfair labor practices” by employers (section 8). The NLRA was modified in 1946 by the Labor Management Relations Act (also known as Taft-Hartley), in which Congress overrode President Truman’s veto with a super-majority.
Taft-Hartley amended the NLRA so as to add “unfair labor practices” of unions, including secondary boycotts. Taft-Hartley also allowed states to pass right-to-work laws that ban union security agreements. (A union security agreement is where the employer and union agree to compel non-union employees to pay minimum union fees for the benefit of union representation.) While the NLRA strengthened unions, Taft-Hartley scaled back union tactics.
Whose Freedom of Association? Many labor union advocates have defended the NLRA as necessary to protect the worker’s right to associate. However, while workers certainly have the freedom to associate with one another, association alone is not what empowers unions. Union activity is only effective if workers interfere with employer property rights and the rights of non-union workers.
The NLRA violates employer rights and non-union worker rights with three legal doctrines: (1) exclusive union representation, (2) mandatory bargaining, and (3) protected picketing and striking. Each doctrine will be discussed below.
Under the NLRA, if more than 50 percent of employees vote in a union, that union exclusively represents all the employees, even those who did not support the union. (While unions can choose to be member-only unions, they almost always choose exclusive representation.) No other unions can be formed to compete with the first union.
Further, unions often negotiate security agreements with the employer, which means that even non-union employees have to pay a partial fee to the unions to cover union bargaining on their behalf. (The justification is that non-union employees would otherwise be free riders.) However, Taft-Hartley allowed states to pass laws that prohibit such security agreements, in what are called “right to work” laws. Exclusive union representation may be under threat following the 2018 Janus v. AFSCME ruling (which prohibited public-sector security agreements) and the growth of right-to-work states.
Once a union is formed, it not only has exclusive representation of all employees, but the employer is also legally required to bargain with the union in good faith (known as mandatory bargaining). This is one of the chief problems with the NLRA, as it compels an employer to bargain with the union. While it is not required that an agreement be reached, the employer must make a “good-faith” effort in bargaining (the standard of which is determined by the National Labor Relations Board, a creation of the NLRA). This situation involves the government forcing employers to recognize and deal with unions. Union advocates love to speak of the freedom of association of employees. But what about the freedom of association of the other parties involved, namely employers and non-union employees?
Monopoly Pricing and the Strike Exclusive representation and mandatory bargaining create an environment where employers are forced to deal with unions. However, this alone does not provide unions all the employment benefits they want. An employer could make a “good faith” effort at bargaining and still refuse to meet the union’s demands. The union must therefore put pressure on the employer, using what union advocates call “economic weapons.” The greatest of these weapons is the strike.
Employers certainly find it inconvenient when union employees refuse to work because of unmet demands, but employers can usually find substitute workers willing to take their place. The union response to this is to seek to prevent such workers (termed “scabs” by the unions) from taking the union employees’ jobs. Thus, the union employees not only refuse to work until their demands are met, but they also picket the employer’s property in order to prevent non-unionized workers from replacing them. Unions have often resorted to violence in order to prevent the crossing of picketing lines by replacement workers. Economist Thomas DiLorenzo explains how violence against competitors has always been inherit to unions:
Historically, the main “weapon” that unions have employed to try to push wages above the levels that employees could get by bargaining for themselves on the free market without a union has been the strike. But in order for the strike to work, and for unions to have any significance at all, some form of coercion or violence must be used to keep competing workers out of the labor market.
Union coercion ends up targeting competition in labor, namely non-unionized workers. DiLorenzo says, “Thus, strikes — and unions in general — represent a conflict between unionized and non-unionized labor much more than between unions and management.”
Theologian Robert Lewis Dabney recognized this role of the strike in 1891, 44 years prior to the NLRA — “The true logic of the strike system is this: It is a forcible attempt to invade and dominate the legitimate influence of the universal economic law of supply and demand ... labor unions are rather conspiracies against fellow citizens and fellow laborers, than against oppressive employers.” (“The Labor Union, the Strike and the Commune” in Discussions, vol. 4, p. 298). That was in a day when courts were able to enjoin strikes. But thanks to the NLRA, the strike is now a legally favored act.
The NLRA protects union strikes by prohibiting employers from firing striking workers and then requiring the restoration of the jobs of striking workers if possible. This has created an absurd situation where employers have a legal obligation to restore the jobs of those who refuse to work for the pay offered by the employer. As Murray Rothbard says, “Their view is that the worker somehow ‘owns’ his job, and that therefore it should be illegal for an employer to bid permanent farewell to striking workers. ... No one has a ‘right to a job’ in the future; one only has the right to be paid for work contracted and already performed. No one should have the ‘right’ to have his hand in the pocket of his employer forever; that is not a ‘right’ but a systematic theft of other people’s property.”
This is how unions raise employee wages, as they limit the supply of workers competing in their field. Unions do not increase wages through increased productivity but by driving out non-union labor. As Gary North explains, unions depend on monopoly pricing:
The economics of monopoly pricing is the foundation of all modern trade unionism. This is either not understood by the supporters of trade unions, or else it is rejected as irrelevant. You will search your days in vain trying to find a supporter of trade unions who is also a supporter of business monopolies, yet the economics of each is identical. The labor union achieves higher wages for its members by excluding non-members from access to the competition for the available jobs. In other words, those who are excluded must seek employment in occupations that they regard as second-best. They bear the primary burden in the marketplace; they are the ones who pay the heaviest price for the higher than market wages enjoyed by those inside the union.
It is important to recognize that unions do actually increase the wages of union employees. However, unions do this at the expense of other workers, as they rely on coercion to create monopoly pricing of their labor. Instead of protecting employers and non-union workers, the NLRA protects the violent behavior inherent to striking and picketing.
Repealing the NLRA Union supporters often speak of unions seeking to equalize the “bargaining power” of workers to that of employers. However, this claim about disparate “bargaining power” between employers and workers is flawed. Workers have bargaining power if they have alternatives to employment at a particular workplace. In seeking to attract the best workers, employers compete with one another by offering higher wages.
Thomas E. Woods shows that workers have done just fine without unions, seen in the rise of wages prior to the NLRA: “Labor historians and activists would doubtless be at a loss to explain why, at a time when unionism was numerically negligible (a whopping three percent of the American labor force was unionized by 1900) and federal regulation all but nonexistent, real wages in manufacturing climbed an incredible 50 percent in the United States from 1860–1890, and another 37 percent from 1890-–914, or why American workers were so much better off than their much more heavily unionized counterparts in Europe. Most of them seem to cope with these inconvenient facts by neglecting to mention them at all.”
Unions are not necessary for economic prosperity. And while unions do raise wages, they do so through coercive means and at the expense of their competition. Unions are ineffective without special legislation like the NLRA that protects their violation of employer property rights and non-union worker rights.
The good news is that unions are on the decline in the United States, and many states have passed right-to-work laws that have weakened them further. Yet there is a long way to go in restoring the property rights of employers and the association rights of non-union workers. The NLRA’s government-mandated duty for employers to negotiate with unions, along with exclusive representation and the prohibition of firing workers for striking, are laws that have no place in a free society. The only solution is to repeal the NLRA.
Last week Business Insider published an article with the eye-opening title “NYC's $15 minimum wage hasn't brought the restaurant apocalypse — it's helped them thrive.”
Given the political momentum for the “Fight for 15” movement, culminating in the House voting in favor of a $15 national minimum wage last month, the article made for perfect social media fodder. Finally, proof that a basic understanding of labor economics is simply – to borrow from the last Democratic debate – another “right wing talking point.”
Unfortunately both the article and, more importantly, the study it is based on do not hold up particularly well upon any sort of serious analysis.
For one, the idea that minimum wage laws have been the key to the success of New York City's food scene is ridiculous on its face. To be fair, the underlying study makes sure to point out that it “does not suggest that New York City’s sharp minimum wage increase caused restaurant employment to soar,” in spite of BI’s headline; the problem, however, is that in doing so it simply dismisses a major issue with the analysis – that the costs of NYC’s minimum law are impossible to measure. After all, the question is what would NYC’s restaurant scene look like if not for the recent minimum wage law increase, not how it looks in comparison to other major cities. It’s a classic situation of the seen and the unseen.
The Data Doesn’t Support the Study’s Conclusions Understandably, this line of argument is likely to be unpersuasive to someone not already convinced of the folly of minimum wage increases. The real issue with the study is that a deeper look into the numbers paint a far-less rosy picture than any of the authors would like us to believe.
For example, the study looks at the performance of restaurant labor in NYC between 2013 and 2018. The issue here is that New York City’s $15 minimum wage law wasn’t signed until 2016, more than halfway through the analysis.
The details of the law itself are also relevant. The legislation had two different wage increase schedules, based on the size of the business.
For businesses with at least 11 employees:
$11.00 per hour on December 31, 2016$13.00 per hour on December 31, 2017$15.00 per hour on December 31, 2018. For businesses employers with 10 or fewer:
$10.50 per hour on December 31, 2016$12.00 per hour on December 31, 2017$13.50 per hour on December 31, 2018$15.00 per hour on December 31, 2019 While the study claims that the data “clearly shows that the large wage floor rise did not diminish various indicators of restaurant performance, including job growth,” their own data shows otherwise.
For example, Figure 1 of the study shows that while there was significant growth in restaurant employment between 2016 and 2017, growth from 2017 and 2018 stagnated to a slower rate than non-restaurants. This would seem to contradict the authors' findings.
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Further, looking beyond the study, a New York City report found that “In 2018, employment at full-service restaurants fell by 2,700 jobs, the first decline since 2002.”
The limitation of the study also means it could not take into account changes to New York City restaurant employment after the $15 per hour rate kicked in.
As Investor Business Daily noted in February:
In just the last three months of last year, 4,000 workers lost jobs at full-service restaurants, Bureau of Labor Statistics data show.
By the end of last year, there were fewer restaurant workers in the city than in November 2016. Even though overall employment climbed by more than 163,000.
It went on to project further job losses based on industry survey data:
A New York City Hospitality Alliance survey found that 47% of full-service restaurants expect to cut jobs this year to cope with the latest wage hike. Last year, 36% said they'd eliminated jobs. The picture is worse at limited-service restaurants. The survey found half reported cutting jobs last year. And 53% say they'll do so this year.
As AEI's Mark Perry noted, "it usually takes an economic recession to cause year-over-year job losses at NYC's full-service restaurants."
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In related news, we’ve seen significant growth in automation in cities like New York, in part due to the increasing cost of labor. Once again we see policies passed in the name of helping workers end up just benefiting businesses that can afford the upfront cost of automation, explaining decisions like Amazon’s recent expansion of their cashier-less grocery stores.
The Purchasing Power of the Minimum Wage While the study’s claims about the impact of job numbers don’t stand up to scrutiny, that does not mean it’s not true that some workers benefited from the wage increase.
According to the study’s findings, NYC restaurant wages outpaced 12 other large markets.
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Of course, the study does not factor in the cost of living differences between these cities. For example, according to the Bureau of Labor Statistics, Nashville’s average wage for “Food preparation and serving related” was just higher than $11 an hour. While an increase from $11 to $15 would represent a 36% increase in wages, the current cost of living increase from Nashville to New York City ranges between 121% (Queens) and 389% (Manhattan) according to NerdWallet.
In fact, the study itself finds a correlation between 2016 minimum wage law and an increase in the cost of dining out.
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Minimum Wage and Youth Unemployment Lastly, left entirely unaddressed in the study is any attempt to measure the costs of minimum wage increases on those most vulnerable to its effects, such as young workers without resumes, and those who are re-entering the workforce. As politicians arbitrarily increase the minimum wage, these are the workers at greatest risk of being priced out of the market. As such, we’d expect to see higher unemployment rates for these workers.
The data suggests that this is precisely what we see.
In July, national youth unemployment (16-24 year olds) was at 8.5%.
The most recent data I can find for New York City youth unemployment is from 2017, showing the city unemployment rate for 20-24 year-olds was at almost 16%. To try to get a better comparison, national youth unemployment in 2017 averaged at 9.3%. Still, the NYC data’s focus on 20-24 year-olds means that a true apples-for-apples comparison of 16-24 year-olds would likely result in a much higher unemployment rate given that, nationally, the unemployment rate for 16-19 year-olds is substantially higher than their (relative) elders.
While the disproportionally high NYC youth unemployment rates may not be entirely driven by minimum wage laws, basic economic analysis would suggest it plays a significant role in what the Brookings Institute has described as a looming “urban youth unemployment crisis.” Naturally, cities are responding not by ending their intervention in labor markets, but by creating new government programs.
With that, a new opportunity for a bad economic study has been created.
It's become common now to read arguments claiming that immigrants — broadly speaking — are good for the economy, or good for "America" in some other fashion.
"Migrants and refugees are good for economies," Nature magazine claims. "Open Immigration Is Good for the Health of People and the Economy," another writer claims. "1,500 economists to Trump: Immigrants are good for the U.S. economy," CNN insists.
Now, I'm not one to argue against freedom of contract and exchange between US citizens and foreign nationals. In other words, if a private employer wishes to offer a job to a foreign national, that foreign national should be free to accept. Similarly, if an American landlord wants to enter into a lease agreement with a foreigner, that ought to be the landlord's prerogative.
Note that in these cases, however, the private parties involved are specific individuals. The landlord and the employer have not entered into agreements with some vague concept of "immigrants." They're doing business with certain individuals who happen to be immigrants.
At the heart of this reality is a very important fact: immigrants are not homogeneous. Each person has different skills, different needs, and different luck. Moreover, immigrants aren't even homogeneous within certain national groups. An English-speaking middle-class non-felon from Mexico clearly has little in common with a gangland assassin from the same country.
Thus, we cannot say that immigrants in general are good for the economy or good for anything else. Some are. Some aren't.
For this reason, it would of course also be factually incorrect to say "migrants and refugees are bad for economies," or "immigrants cause crime" or "immigrants are a burden on the public purse." No doubt this is true about some immigrants.But it's certainly not true of all of them. Thus, every time I see a headline that blares "Immigrants are good for America," I wonder: "Do they mean all of them?"
But which ones are delightful neighbors and customers, and which ones are future drains on the taxpayer?
This has always been the central problem of immigration policy.
A Different Approch Contrary to myths about the United States having totally open borders in the nineteenth century, many US states did, in fact, employ a variety of legal schemes to prevent entry to certain immigrants who were thought to be paupers who would be a drain on the public purse. (States did this because most people at the time agreed the federal government was not granted power of immigration matters.) New York and Massachusetts were especially notable for efforts to refuse entry to certain immigrants thought to be unemployable.
[RELATED: American Immigration Policy 160 Years Ago by Ryan McMaken]
These laws go back to colonial times — and even to England — where poor laws were devised to prevent outsiders from settling — uninvited — in a new village or district where they could then exploit poverty-relief resources intended for the locals.
It was not until later that the Federal governments began to set overall quotas and to even base immigration laws on country of origin rather than on the specific traits of immigrants.
Thus, from the 1880s onward, the Federal government increasingly began to adopt a prohibitionist approach, the most notable instance of which was the Chinese Exclusion Act of 1882.
Quota systems like this, however, have always smacked of central planning and anti-capitalism. They engage in wholesale prohibition and regulation of entire classes of immigrants, regardless of the wants or needs of native employers, families, and charitable groups who might be interested in hosting these immigrants.
A wholesale ban on immigrants from Country X is about as compatible with a free economy as is a ban on imports from Country Y. It's nothing more than a case of politicians deciding arbitrarily what sorts of economic activity Americans will be allowed to engage in.
Moreover, even in the days when states attempted to refuse entry to suspected "paupers, vagabonds, and possible convicts," entry could sometimes be dependent on the use of bonding. In these cases, those those who attempted to "import" immigrants were required to post a bond under which the state could be compensated in case the new migrants ended up on the dole — whether in prison or in the poorhouse.
[RELATED: "Only the Private Sector Can Determine the "Correct" Number of Immigrants" by Ryan McMaken]
Reasonable Americans recognized that while some immigrants might bring risks to the native population, many did not. This, incidentally, is true of all imports, human and otherwise. After all, agricultural imports have always brought with them the risk of invasive species or diseases that threaten native crops. The response to these threats has been to address the risky imports without banning the good.
In a modern context, resurrecting and emphasizing strategies like these — while eschewing a prohibitionist approach — would help to lessen the role of the state in the lives of both citizens and migrants alike.
For this reason, immigration policy ought to be adopted to allow for more flexibility, free association, and market exchange, while still addressing issues such as criminality and what was once called "pauperism":
Expedited or immediate entry for any immigrant who forfeits all access to publicly funded subsidies and amenities including public schools, Medicaid, and similar programs.A sponsorship, bonding and "adoption" program for private individuals, employers, and charitable organizations who are willing to financially "vouch" for immigrants. Should these immigrants turn out to be criminals or users of public funds, the sponsoring entities will be held liable. Immigrants who can find no sponsor in these situations will be deported.Abolish immigration ceilings, but restrict entry to immigrants who are sponsored and bonded, have forfeited access to public programs, or who can demonstrate financial independence. The goal is to allow for greater freedom for American citizens to engage more freely in trade and other exchanges with immigrants worldwide, while also limiting the risks to taxpayers. This also naturally limits the total volume of immigration — without arbitrary government ceilings — since sponsorships and bonding will be limited by the availability of private resources.
This plan, of course, will fail to please those anti-immigrant enthusiasts who simply don't want any freedom of movement across the border at all. They think their personal feelings about American demographics and culture justifies using the power of the federal government to override private agreements and free association. On the other hand, this plan will also fail to please those Americans who are dedicated to maximizing the inflow of immigrants for ideological and political reasons. For them, immigration is a means of re-shaping American culture to better suit their preferences. And the more it's subsidized by government, the better. Both sides look to government to force their own immigration preferences on others, and to override the decisions of the private sector, which the activists on both sides mistrust.
For a great many Americans, though, their concerns are often limited to fears about criminality and strains on taxpayer-funded resources. But as with so much else, these problems can be addressed by moving more in the direction of private markets and allowing immigration flows to be determined more by the private sector, whether for-profit or charitable.
Tools as a Form of CharityBoth fact and logic seem to me to support the view that savings invested in privately owned economic tools of production amount to an act of charity. And further, I believe it to be — as a type — the greatest economic charity of all.
By economic tools of production I mean, of course, things with exchange value — trucks, factories, railroads, stores — which assist human effort in the production of other items of economic worth.
Does saving and investment in these tools qualify as charity? Does it meet the three tests of an act of charity?
The first test is whether there has been a transfer of privately owned things having economic worth. It is true that when one saves and invests in a tool which he uses in production, although he retains title to the tool, most of the extra production which the tool makes possible passes on to others, as we shall see. For that reason the first requisite of an act of charity seems to be met as a certain consequence of saving and investment in tools. It is this feature of the creation of privately owned capital which is its charitable aspect.
The second test of charity is that the transfer of economic benefits shall be voluntary. Did anybody steal anything? Was anybody coerced? So long as the tools are privately owned and their use functions in a free market, the process has to be voluntary for everybody involved. But state ownership or control of tools, as is common in Russia, violates this requirement.
The third test of charity is anonymity. The charitable feature of savings and tools arises from the extra production that flows from it as a consequence and which goes in large degree to others than the one who saved and invested in the tool — to others than the owner of the tool. It is anonymous because the beneficiaries do not know its source. Most of them do not even know how they are benefiting from it at all. They do not know this because they have been victimized by a thorough saturation with the surplus value theory. They even think of themselves as being victimized by these capitalists who own the tools they are using.
One can easily test from his own experience the anonymity of the charity that flows from savings and investment in tools. If one will list all the economic items he consumes or enjoys in a day, the test is to try in each instance to name specifically all the persons whose savings and investment made the item possible. Most of us, I dare say, could not name even one person responsible for an item we use and enjoy. This illustrates the anonymity of the millions of unknown persons responsible for the things we enjoy.
So savings and the tools of production meet all three tests of charity, and thus qualify as charity. How many of the things we commonly call "charities" can equally qualify by these three tests?
The Productive Power of ToolsA large part of the high level of economic living we now enjoy in the United States arises from the use of tools.
The average person in the United States has available for consumption upwards of ten times that of persons in the less prosperous half of the world. The reason for their poverty is a lack of savings invested in tools of production. In all their history over the ages they have accumulated little beyond the most primitive and simple tools, such as crude plows and hoes.
Harder work by us is not the reason why we can enjoy ten times as much economic welfare as they do. Persons in the United States work no harder, if as hard, as do the poorer half of the world's population. Even including mental work along with sheer muscular effort, both of which contribute to output, I doubt if we work any harder — overall.
Nor does innate intelligence seem to explain the difference. We probably have no more geniuses per thousand population than they do.
Lacking any of our accumulation of tools, our output per worker probably would be even lower than that of the poorer half of the world at the present time; even their production is aided considerably by their simple tools. Comparison of their output with ours suggests that without any tools whatsoever our output would be reduced to perhaps one-twentieth of what it now is. To say it another way, perhaps 95 percent of our present output in the United States is made possible by the presence of our tools. These tools are available because in the past some wise people saved and invested in tools.
Who Gets the Output Due to Tools?The next question is, Who gets this great increase in production? Evidence shows that a large part of it goes to others than those who did the saving and who hold the titles of ownership to the tools. It goes mostly to those who use the tools.
It has been estimated that only about 15 percent of the national income in the United States goes to the owners of capital as current income.F. A. Harper, The Crisis of the Free Market, 1945, p. 66. This is the amount of dividends, interest, rents, and royalties together with their equivalents in owner-operated businesses. The other 85 percent of the national income is paid currently for work, as distinguished from pay to owners for savings they have invested in tools. This figure for current work includes both wages paid to employees and its equivalent to those self-employed.
The question at once arises as to why so small a proportion of the product goes for capital, when capital is so highly productive? If we were to assume that those who save and invest in tools are entitled to the full increase in output that comes from the use of these tools as an aid to manual labor, it would appear from the evidence already given that justice would decree a division about like this: 95 percent for the owners and 5 percent for the users.
And so we may summarize:
To theTool OwnersTo theTool UsersTotalIf full production increasewere to go to the owners
955100Actual division in the UnitedStates at present
1585100Division according to Marx'ssurplus value theory
0100100Presuming these figures to be accurate, one must conclude that the saver-investor is receiving less than one-sixth of the return which his saving and investing has made possible — 15 received from the 95 produced. The other five-sixths of the increase goes to the users of the tools, enhancing their pay seventeen times — 85 received and 5 produced.
A person is lucky if by chance he happens to have been born in the United States where he can share directly in the bounty tools create. By having been born here he is enabled to work with tools that are now available because others have saved in the past. His income from current effort will, by these figures, be enhanced 17 times (85 versus 5) because of these tools. Had he been born where no tools had been accumulated whatsoever but would have to work as hard or even harder than in the United States, he would be getting only 1/17th as much for his labors.
This bounty to the users of tools is what I call the greatest economic charity.
Surplus-Value Theory ReviewedThese facts are significant in appraising Marx's surplus value theory. Marx said, in effect, that the 15 percent which goes to the owners of the tools is surplus value because the user of the tool — according to Marx — deserves the full 100 percent.
It is from the productive power of tools as aids to the manual efforts of man that something which might be called a surplus value arises. This surplus, as has been indicated, has raised US production from a level of 5 to a level of 100. So a counter claim to that of Marx would be that the full increase of 95 (100 minus 5) — the amount of surplus value created by the tools — should go to the one whose savings created the tools. But who really gets this surplus value of 95? The owner gets 15 and the user gets 80. Not a bad deal for the user!
Surplus value of a different sort arises in every instance of voluntary exchange in a free market. If one farmer trades a bushel of wheat to a merchant for a shirt, it is because the farmer prefers the shirt to the wheat and the merchant prefers the wheat to the shirt. The trade creates a surplus value for each of the participants, but the amounts of surplus value thus created are not subject to measurement by any device we now know or can contemplate. They are compensating in direction but not necessarily in amount, because the amount is entirely a matter of subjective appraisal. Being unknown in amount by both parties and probably not even thought of in these terms at all, no sense of residual obligation is created. This makes the process closely akin to anonymity. The center of interest of this discussion, however, is surplus value of the type created by tools as an act of economic charity. Therefore the phenomenon of surplus value created by exchange will not be dealt with further here.
In a free economy the process of deciding the division of the surplus value created by the use of tools occurs in the free market. We must accept the decree of private ownership and free exchange as having fairly decided the division, whatever the answer. Yet the answer given in the free market reveals that private capitalists — the "selfish owners," as those who save and invest are so often called — are really the greatest charity-givers of all.
It is also interesting to note the magnitude of charity arising from private capital in relation to "religious and welfare activities" contributions. About 2 billion dollars are given to religious and welfare activities in the United States each year. This is less than 1 percent of the amount of charity which the users of tools receive in their pay envelopes, according to this concept, in the same length of time.
This article is excerpted from On Freedom and Free Enterprise: Essays in Honor of Ludwig von Mises (1956).
When reading about the curious case of Garrison Keillor, the public radio icon fired for what he considers an innocent misunderstanding—or was it payback for his defense of Senator Al Franken?—I noticed a line in a comments section about where today’s raging response to sexual harassment (among other fruits of the sexual revolution) is likely to lead.
The commenter, michaeljames49, said: “Best advice if you own a business, hire men.”
So went several comments on the theme that sexual harassment and other egregious acts, many scores more serious than what Keillor has been accused of, is just what happens when men and women work together, that this cannot be avoided, and that, moving forward, it would be better to simply avoid integrating men and women in workplaces. The conclusion: Hiring all men or all women would save a lot of grief.
While I believe freedom of association is a natural right, I’m not so sure michaeljames49 and his interlocutors had Lysander Spooner in mind when making their point. Yet, I believe they inadvertently fell onto a likely end of our era’s anti-harassment zeitgeist, namely, that the workplace of the future will be less woman-friendly. There is sound economic logic leading to this state of affairs.
The Cost of State-Sanctioned Victim StatusConsider the case of two applicants of equal talent applying for the same job. Although both are likely to add the same level of revenue to the firm, one’s chromosomal composition is xx while the other’s is xy, a distinction that matters more today than it did a year ago. Employers are likely to hire the candidate less aligned with state-sanctioned victim status and the legal favoritism and potential costs it brings.
The argument is no different from the one used by many disability rights organizations that agitate for the end of the Americans with Disabilities Act out of the belief that that intervention increased the cost to hiring disabled workers and caused employers to hire less of them. The result was what Lew Rockwell called “a human rights disaster” and “the longest slide in disabled employment ever recorded, according to five different measures used to record unemployment among the disabled.”
In the same way, when anti-harassment lawsuits are filed and when state oversight of the workplace is increased even further than today’s level, female job applicants will inevitably seem bring additional costs to the hiring decision. Private-sector employers—at least those without deep pockets to finance vast HR and legal bureaucracies—will avoid hiring women to avoid litigation.
Such logic explains the explosive growth of the temp-worker staffing firm, Manpower, whose 4.4 million workers ranks it among the largest employers in the world. Its size is directly related to the increasing costs of labor imposed by governments. This intervention into the workplace rewards firms for using capital-intensive production techniques when labor-intensive production might have been just as feasible. The loss in labor flexibility means that employers are less able to take advantage of profit opportunities that arise when market conditions call for increased production of goods. The loss in flexibility also means that employers are less able to scale back their workforces when reduced production is called for as well.
Such a situation benefits large firms because it increases the cost to smaller competitors. Indeed, it reduces the degree of competition and entrepreneurial activity in general because the regulatory framework is biased toward the big, established firms that can afford to comply with the costs.
If the current wave of righteous disgust toward workplace harassment leads to new rounds of workplace interventions—think of a female-focused Civil Rights Act of 2019—I’d expect adverse impacts on workforce options available to women as employers respond to increased costs associated with their hiring. Some employers may very well decide to segregate workers by gender as a cost-saving measure (as suggested by michaeljames49). But more generally, others will simply resist hiring workers they believe carry special risks to their profitability.
This would be bad for many reasons, and not only because it would hinder the free movement of women into the labor force and restrict the division of labor. It would also distract from what I think is the most important aspect of this Age of Anti-Harassment, namely that it should be a Rothbardian teachable moment.
What Would Murray Say?Let’s remember that an act is not harassment unless it is unwanted, at which point it becomes a violation of one’s property rights over his or her body. “In a free society,” said Rothbard in Man, Economy, and State, “as we have stated, every man is a self-owner. No man is allowed to own the body or mind of another, that being the essence of slavery.” In all of the cases of harassment about which we have read in recent weeks, the common denominator is that one party felt unable to opt out of a confrontation, while the perpetrator attempted to take advantage of this perceived inability.
Since all rights have their basis in property rights, charges of harassment stem from the aggressor party employing coercion and compulsion against another. The problem is not in aggressive actions per se, but in the inability, perceived or actual, of the targeted party to assume ownership of her body and walk away.
That many are doing so today is due to the market system itself. An important factor enabling women to opt out of such confrontations, identify their transgressors and (possibly) take them to court, lies in the fact that the division of labor has so expanded that this is now possible in ways unknown to previous generations. An aggrieved worker no longer requires employment with a Weinstein Company or NBC, a Fox or Minnesota Public Radio. The more alternatives provided by the market, the less likely these workers are to tolerate boorish and or even criminal behavior, while giving their employers greater incentives to root it out.
The role of the market in enabling today’s anti-harassment movement seems universally ignored. If anything, whenever markets are brought up, it is to demonstrate their failures in allowing harassment and justify further government intervention. Yet it is no mistake the harassment complaints we’re reading about occur in crony firms and cartelized industries. More competitive firms simply cannot afford to lose good workers due to insecure work environments and have greater incentives not to tolerate them, relative to less competitive and more protected firms.
Perhaps Garrison Keillor’s biggest mistake was associating with a de facto state bureaucracy such as Minnesota Public Radio in the first place. Notwithstanding his exemplary skills as a writer and performer, he was also a lifelong defender of the modern liberalism that gave birth to public radio, such that the attacks on Senator Franken were of concern to him to the extent that they threatened other statist causes.
But statism, like sexual harassment, employs tools of compulsion and coercion to achieve some desired end. One hopes Keillor comes to appreciate the value of secession, of opting out, and of walking away.
Most of us both value and take for granted the ability to make decisions about our own lives. When busybodies put their noses and their mouths into our personal affairs, we often say or at least think, “Mind your own business.” Unfortunately, we live in a world in which too frequently government won’t leave us alone, and instead, very actively tries to mind our business for us.
Let us briefly look at one such instance in which Uncle Sam puts his nose in other people’s business, that being the legal hourly minimum wage. The federal government began dictating the minimum lawful amount an employer must pay someone working for them in 1933, as part of Franklin Roosevelt’s New Deal legislation. It was declared unconstitutional in 1935 by the U.S. Supreme Court, but was reinstituted in 1938 as part of the Fair Labor Standard Act, and the Supreme Court (with other judges now on the bench) upheld it in a 1941 decision.
The Minimum Wage vs. Personal ChoiceWhen first implemented the federal hourly minimum wage was set at 25 cents an hour (prices and wages in general were much lower 80 years ago than today, so that represented not a high but a noticeable sum of money at the time). It is currently $7.25 an hour. But in recent years, there has been a call for significantly increasing it to as much as $15 per hour. A variety of cities around the country have, in fact, instituted such legislation within their jurisdictions, with a number of state governments having proposed increases in that direction within their respective boundaries.
The assertion is made that anything less than an hourly wage in that general amount (or more!) is denying a person the chance to earn a “living wage.” It is offered as paternalistic intervention in the labor market meant to improve the working and living conditions of those who may be unskilled or poorly experienced to have a chance to earn enough to get ahead in life.
Who, after all, can be against someone having some minimal amount to live decently? Only the cold, callus, and uncaring, surely; or those who are apologists and accomplices of the greedy, selfish, and profit-hungry businessmen who have no sense of humanity for those who are in their employ. That’s why there needs to be a law.
Left rarely asked and less often answered is, who is the government or those behind such legislation to tell people at what hourly pay they may work in the marketplace and how much an employer is required to pay them? Essential to human freedom is the liberty for each individual to say “yes” or “no” to an offer made by another concerning some potential association, interaction, or exchange among two or more persons.
Forcing or Prohibiting ExchangeSuppose I go into a shoe store and after looking around and trying on a few pairs, I decide to leave the store empty handed because the store does not have the styles or the fit I’m interested in, or because the shoes are not offered at prices that seem worth paying. But suppose, now, that a large gruff fellow stands in the doorway, and declares, “Da boss says you ain’t leavin’ till ya buy a pair of shoes at da price he says you gotta pay.”
I think most of us would consider this to be outrageous and unethical. Most of us would no doubt say to ourselves, who is this guy or his boss to tell me what shoes I have to buy and at a price that I consider to be more than those shoes are worth to me, or which is beyond what my budget can afford?
Further suppose that the bouncer replies to any such remark you might make, by saying, “Unless ya buy a pair of shoes at dis minimum price, the da boss says he can’t afford to pay me and de uda employees a “livin’ wage.’ Cough up da dough — or else.” Many of us might try to pull out our cell phones and dial 911 for police assistance.
We take it for granted that no one, regardless of the rationale, should be able to force us into an exchange or a relationship not of our own choosing and voluntary consent. Otherwise, we are a victim, a slave, to the other person’s wants and wishes, at our coerced expense.
We would also be much aggrieved if there was a mutually agreeable association or exchange opportunity into which we did want to enter, but someone comes along and tells us that we cannot, even if that association or exchange did not physically harm or defraud anyone else in the process.
Yet, this is precisely what the government mandated minimum wage laws demand of market participants in American society. Government coercively imposes the terms under which one group of people may accept employment and another group may hire them for jobs to be done. What are some of the consequences from this government-legislated minimum wage intervention into the marketplace?
The Minimum Wage and Low Skilled UnemploymentFirst, it results in some who might have found acceptable and gainful employment from doing so. This is especially true of the unskilled and workplace inexperienced in the labor force. The only source of revenues from which an employer can pay salaries to all those he may employ is from producing, marketing and selling a product to willing consumers at a price they are willing to pay for what he is offering for sale.
The employer, therefore, must ask himself, does an existing or would a prospective employee contribute a value-added to his production process that is less than or more than the value of the finished product that employee may be able to assist in manufacturing? All of us would like to get a bargain (paying less for something than we think it is worth to ourselves), but we never intentionally pay more for something that what we prospectively consider it to be worth.
Any worker whose value-added is viewed by the employer to be greater than the competitive market wage that has to be paid for his hire is offered work by the employer in question. When the government imposes a legal minimum hourly wage above the wage currently prevailing for various types of labor services, the law necessarily threatens the employment of any and all workers who’s estimated value-added is now less than the mandated legal minimum wage.
Suppose that a worker helps to produce an addition to marketable output that has a competitive value of, say, $5 an hour. But the government now imposes a minimum wage of $7.25 per hour. Those workers whose value-added is only $5 an hour will find themselves priced out of the market, because from the employer’s perspective, they cost more to employ than they are worth in terms of value-adding revenue to be earned from their hire at a minimum wage of $7.25. A private enterpriser cannot successfully maintain or establish a profitable competitive edge in the long run, if (at the margin) he has to pay $7.25 for what has a market worth of $5.
The Minimum Wage vs. Earned Labor SkillsBut the harm runs deeper for the employee who either loses his job due to the legal minimum wage or who, to begin with, never gets a job due to the law. The lowest earners in the labor market are usually those with the least skills and work experience. That is why their productive worth is at the lower end of the wage scale.
But how can they ever acquire the on-the-job training, experience and workplace skills if the minimum wage so prices them out of the market that they may never have the opportunity to get their foot on the bottom or lower rungs of ‘the ladder of success”? By being priced out of the market in this way due to minimum wage legislation, some of them may be condemned to permanent unemployment.
In our day-and-age of the modern redistributive state, such persistent unemployment due to the minimum wage means that those who are gainfully employed find themselves taxed even more than would otherwise have been the case. Their salaries must provide the needed government tax revenues to cover the income transfer costs that the welfare system is expected to incur to meet the “needs” of those the government’s own minimum wage policy has forced into and left in the rolls of the unemployed.
Minimum Wage Laws and the Black MarketAn additional unintended consequence is that those thus left in the limbo land of unemployment who wish to have more money than the welfare state redistributes to them turn to alternative lines of work: the underground and black market economies. Both are market economies, only the underground economy is often the arena in which income may be earned outside of the prying eyes of the tax-collectors, even though the type of product or service offered for cash is completely legal but with less of a paper trail for the taxing authorities to follow.
The black market usually connotes goods or services that are legally prohibited by the government from being openly produced, sold and used: narcotics and other drugs, prostitution, and various forms of gambling, for instance. While both underground and black markets have their seamier sides, especially the trade in prohibited or heavily restricted or controlled products tend to attract market participants of a violent, cruel and deadly type. Thus, some thrown into unemployment due to the minimum wage are drawn into arenas of crime, corruption and thuggish coercion to earn a living. This is an outcome, surely, that few who campaigned for minimum wage laws originally had in mind when doing so.
Who Decides Wages: People or Politicians?But behind all of these negative and usually unintended consequences arising from the imposing of a government-enforced hourly minimum wage remains the fundamental ethical issue: who shall have the right to decide under what terms and conditions people enter into gainful employment? Shall it be the individuals, themselves, who decide what is an acceptable wage, given their own skill set and the market opportunities they find in the neighborhoods in which they look for work? Shall it be the prospective employers who offer work to others based on their market-based estimate of the worth of a possible employee in relation to the value of the good or service he might assist in producing, in the context of the employer’s hope of profitable success in offering goods to the consumer public
Or shall it be politicians and bureaucrats pressured by various interest groups with their own motives for asserting a right to dictate and determine the wage at which individuals who they personally know nothing about will be allowed to find a job? There is an inescapable arrogance, a hubris, on the part of those who claim to know what a person is worth in the marketplace and the wage at which he may or may not be hired, separate from the potential trading partners, themselves, respectively interested in finding useful employees to hire and those looking for income-earning employment.
In this the political paternalists who insist upon setting minimum wages through government command and control closely resemble the socialist central planners of the twentieth century. They suffer from that same “pretense of knowledge” that F. A. Hayek criticized nearly 45 years ago in his Nobel lecture. They suffer from dangerous delusion that they possess enough wisdom to know better than people, themselves, how they should live and work, and the terms under which they may contract and exchange for mutual gain.
Freedom requires that every individual have the liberty to peacefully decide how best to direct and plan his own life, and in voluntary association with others in the various corners of society. They are not free when the government can interpose itself and dictate the wage at which a human being may offer his labor services and another may choose to employ him. Anything less makes everyone an economic victim and tool of the coercing control of those commanding the halls of government.
Reprinted with permission.
When I started writing popular articles about economics, one of my major motivations was to demonstrate to my undergraduate students that it didn’t require advanced degrees in economics for them to competently evaluate economic policy issues and claims. They could get a long way simply by using careful, logical thinking, and consistently-applied basic economic principles, because those tools reveal most of the errors. I thought of Frédéric Bastiat and Henry Hazlitt as inspirations.
Over 30 years later, applying that approach a multitude of times has convinced me even more strongly of the value of that focus. And despite my early fears that I would run out of issues to write about, that has not happened. It seems there is a virtually inexhaustible supply of poorly thought out policies and proposals.
Project Labor Agreements (PLAs) provide a good example, and the possibility of over $1.5 trillion in new infrastructure spending on the horizon means that there are plenty of zeros at stake in getting our understanding right.
Why PLAs? A PLA is a pre-hire collective bargaining agreement which establishes the terms and conditions of employment for a specific construction project. A government-mandated PLA is an agreement typically drafted by unions with no input from non-union contractors that governments require both union and nonunion contractors to follow prior to accepting bids on a public construction project. PLAs establish the terms and conditions of employment that will be required for all construction workers employed on a specific project. Typical PLA terms include union representation and mandatory membership or union dues for all workers (including those who work for non-union employers). PLA terms also mandate following union work classifications and rules, including hiring all workers from union hiring halls, hiring all apprentices from union apprenticeship programs, and contributing to union benefit and multi-employer pension plans (that few, if any, non-union members will get a penny from, in the long run).
Unions claim that PLAs are justified because they generate lower project costs, while increasing safety and quality, “leveling the playing field” for competing bidders, buying labor peace, and guaranteeing that projects are completed on time. Defenders put plenty of resources into reiterating those claims and into “studies” that back PLA’s superiority by “friends” that have never met a union assertion they didn’t like.
Relying on such claims, the federal government has permitted, and even encouraged, state and local governments to require PLAs for projects utilizing federal money. (See President Obama’s Executive Order 13502, which encourages federal agencies building federal construction projects exceeding $25 million to mandate PLAs on a case-by-case basis, and allows state and local governments to mandate PLAs on federally-assisted projects.) Some Democrat-controlled state and local governments have enacted mandatory PLAs when their money is involved.
The Case Against PLAsThere is a great deal of evidence that contradict these claims of efficiency. For example, a May 5, 1998 GAO investigation could not document any cost efficiencies or quality improvements from PLAs. Diana Furchtgott-Roth concluded that a PLA “drives out small businesses from competing for these projects; raises their cost to the taxpayers; and funnels a larger stream of union dues from taxpayers’ pockets to union treasuries.” Wharton professor Herbert Northrup wrote in the Journal of Labor Research, that “restraints imposed by government directed PLAs are political decisions which have little or no economic rationale, nor can they be defended on the grounds of labor peace, enhanced safety, or other reasonable criteria.” A May 2017 study by Beacon Hill Institute, which went to great efforts to assemble as sophisticated a data set and statistical analysis as possible, because of the welter of unproven claims and the ease of biasing results by statistical sleights-of-hand by those determined to do so, found government-mandated PLAs raised Ohio school project costs by 13 percent, which was consistent with earlier studies measuring the impact of PLA mandates and school construction conducted by think tanks and government entities in California, New Jersey, New York, Connecticut, and Massachusetts.
While discussions of PLAs can get very complicated and well into the weeds of “lies, damned lies and statistics,” asking questions suggested by simple logic can provide plenty of reasons to question union claims.
If PLAs save money and are superior in many other ways, as unions claim, what would be gained by government entities requiring them or banning alternatives? If PLAs are superior, competitive contracts would go to firms using a PLA, anyway. The same logic applies to giving preferential treatment to bidders offering PLAs voluntarily or excluding other costly regulations if a PLA is used on a project.
Yet giving PLAs such advantages are common. My favorite example was California Senate Bill 922 in 2011, barring local governments from banning PLAs. It was reinforced with AB 436 and SB 790, which exempted local governments from some fees if they required PLAs and required public utilities to pay into a union-controlled fund promoting such agreements. When such special advantages are given to PLAs, how can unions claim that mandating them provides “a level playing field”?
Why is there no other area in which PLA-style contracts are used in a comparable manner, if they are such a superior approach? In fact, why are such contracts generally prohibited by the National Labor Relations Act, but with a special exemption for construction PLAs. Further, when PLA mandates and advantages should, following proponents’ logic, be unnecessary for users to win contracts, their continued use makes one suspect that the superiority claims are false.
They Don't Save MoneyIf PLAs are superior ways of organizing the relevant type of projects, why have projects originally bid under PLA agreements, and then rebid without a PLA, seen more competition and substantially lower bid costs as a result? Why would non-union competitors object so strenuously to being required to use PLAs? Wouldn’t their costs be lower and their workforce more efficient, increasing their ability to win bids? For that matter, why are the vast majority of construction industry workers in non-union organizations, if using union organization and rules was generally superior? And where are the studies that show union organization of any industry lowers costs?
Why, when government-mandated PLAs have been banned more generally (e.g., when George Bush’s Executive Order 12818 banned government-mandated PLAs between 2001 and 2008, and now in a total of 24 states) or in a jurisdiction, has there been no jump in costs, decrease in quality, increase in delays, or increase in labor unrest, if those supposedly justify PLAs? Because they are rationalizations, not rationales.
PLAs Aren't More "Inclusive"Given that PLAs tout special minority apprenticeship and training programs to demonstrate their outreach efforts and garner minority support, why do major black, minority, and women’s groups in construction oppose them? Largely because there are fewer minorities in unions than in the non-union sector, so letting unions allocate workers to job sites harms most of them. Those trained in non-union apprenticeship programs (which unions have also long tried to hamstring) are not eligible, either. Further, requiring journeymen and journeymen wages for most tasks, and reducing helper jobs, crowds out minority workers, who are, on average, less skilled. That also limits their ability to get experience and learn their way to higher future incomes. The National Association of Women Business Owners has opposed PLAs, as has the United States Pan-Asian American Chamber of Commerce. The National Black Chamber of Commerce has called PLAs “a license to discriminate against black workers.”
Why do PLAs get defended as a tool in lessening labor unrest? Non-union workers and contractors don’t strike. Unions strike. So it makes more sense to say that PLAs reduce union unrest. But that means PLAs are rewarding unions to pay them off not to disrupt projects, and penalizing those who would not strike and who therefore represent the solution to the problem of unrest. Even some courts have seen this as the extortion it is.
PLAs Aren't Representative of All WorkersWhy don’t negotiations in creating PLAs include non-union contractors? It is not about providing a “level playing field,” as unions claim. It is about mandating the unions’ playing field for those who would not otherwise choose it, and getting union dues from workers and employers unions they could not convince to be members voluntarily. Similarly, why must non-union contractors pay into union health and retirement trust funds under PLAs, even though they contribute into their own health and retirement funds, and few, if any, of their employees will get vested to be eligible for any union benefits?
Why do PLA-endorsing “studies” ignore the many far more reputable studies in the other direction? So they can be presented as authoritative, whether they really are or not. Why do they misrepresent what other studies have found? So they can use strawman arguments to appear defensible when they are not.
And even when PLA proponents torture the data to make it look like PLAs are superior in some cases, what does it prove? It only proves that it might be possible they are better in some cases. But that provides no logical support for mandating PLAs, unions’ most strongly-backed policy choice, since PLA organizations would outcompete other forms of organization where they are superior, anyway. There is no reason to require PLAs, whenever PLA organization is superior; there is also no reason to eliminate the possibility that PLAs would be outcompeted, when they are in fact less efficient.
Given the support unions have provided for so many left-leaning politicians, it is hardly surprising that they back PLA “sweetheart deals” for unions on public construction contracts, particularly since very few Americans understand what is involved. But the arguments made for such policies are Swiss-cheesed with logical errors and internal inconsistencies, as well as questionable statistics. And until supporters can come up with better answers to the questions asked here, and others, there is no reason to give their claims credence.
[Reprinted from Free Market Economics: A Basic Reader, compiled by Bettina G. Greaves.]
The division of labor is a subject which has fascinated social scientists for millennia. Before the advent of modem times, philosophers and theologians concerned themselves with the implications of the idea. Plato saw as the ultimate form of society a community in which social functions would be rigidly separated and maintained; society would be divided into definite functional groups: warriors, artisans, unskilled laborers, rulers. St. Paul, in his first letter to the church at Corinth, went so far as to describe the universal Church in terms of a body: there are hands, feet, eyes, and all are under the head, Christ. Anyone who intends to deal seriously with the study of society must grapple with the question of the division of labor. Karl Marx was no exception.
Marx was more than a mere economist. He was a social scientist in the full meaning of the phrase. The heart of his system was based on the idea of human production. Mankind, Marx asserted, is a totally autonomous species-being, and as such man is the sole creator of the world in which he finds himself. A man cannot be defined apart from his labor: "As individuals express their life, so they are. What they are, therefore, coincides with their production, both with what they produce and with how they produce."The German Ideology (London: Lawrence & Wishart, 1965), p. 32. The very fact that man rationally organizes production is what distinguishes him from the animal kingdom, according to Marx. The concept of production was a kind of intellectual "Archimedean point" for Marx. Every sphere of human life must be interpreted in terms of this single idea: "Religion, family, state, law, science, art, etc., are only particular modes of production, and fall under its general law.""Private Property and Communism," The Economic and Philosophic Manuscripts of 1844, edited by Dirk J. Struik (New York: International Publishers, 1964), p. 136. Given this total reliance on the concept of human labor, it is quite understandable why the division of labor played such an important role in the overall Marxian framework.
Property vs. Labor Marx had a vision of a perfect human society. In this sense, Martin Buber was absolutely correct in including a chapter on Marx in his Paths in Utopia. Marx believed in the existence of a society which preceded recorded human history. In this world, men experienced no sense of alienation because there was no alienated production. Somehow (and here Marx was never very clear) men fell into patterns of alienated production, and from this, private property arose."Estranged Labor," ibid., pp. 116–17. Men began to appropriate the products of other men's labor for their own purposes. In this way, the very products of a man's hands came to be used as a means of enslaving him to another. This theme, which Marx announced as early as 1844, is basic to all of Marx's later economic writings.
Under this system of alienated labor, Marx argued, man's very life forces are stolen from him. The source of man's immediate difficulty is, in this view, the division of labor. The division of labor was, for Marx, the very essence of all that is wrong with the world. It is contrary to man's real essence. The division of labor pits man against his fellow man; it creates class differences; it destroys the unity of the human race. Marx had an almost theological concern with the unity of mankind, and his hostility to the division of labor was therefore total (even totalitarian).
Class Warfare Marx's analysis of the division of labor is remarkably similar to Rousseau's.J.J. Rousseau, Discourse on the Origin of Inequality, in G.D.H. Cole (ed.), The Social Contract and Discourses (London: Dent, 1966), esp. pp. 195–208. Cf. Robert A. Nesbet, "Rousseau and Totalitarianism," Journal of Politics, V (1943), pp. 93–114. Both argued that the desire for private property led to the division of labor, and this in turn gave rise to the existence of separate social classes based on economic differences. The Marxist analysis of politics relies completely upon the validity of this assumption. Without economic classes, there would be no need for a State, since a State is, by definition, nothing more than an instrument of social control used by the members of one class to suppress the members of another.German Ideology, pp. 44–45. Thus, when the proletarian revolution comes, the proletarian class must use the State to destroy the remnants of bourgeois capitalism and the ideology of capitalism. The opposition must be stamped out; here is the meaning of the famous "ten steps" outlined in the Communist Manifesto. Once the opposition is totally eradicated, there will be no more need for a State, since only one class, the proletariat, will be in existence. "In place of the old bourgeois society, with its classes and class antagonisms, we shall have an association in which the free development of each is the condition for the development of all."The Communist Manifesto (1848), in Marx-Engels Selected Works (Moscow: Foreign Languagues Publishing House, 1962), I, p. 54. For a critique of this view of the State, see my study Marx's Religion of Revolution (Nutley, New Jersey: Craig Press, 1968), p. 112.
Marx actually believed that in the communist society beyond the Revolution, the division of labor would be utterly destroyed. All specialization would disappear. This implies that for the purposes of economic production and rational economic planning, all men (and all geographical areas) are created equal. It is precisely this that Christians, conservatives, and libertarians have always denied. Marx wrote in The German Ideology (1845–46):
... in communist society, where nobody has one exclusive sphere of activity but each can become accomplished in any branch he wishes, society regulates the general production and thus makes it possible for me to do one thing today and another tomorrow, to hunt in the morning, fish in the afternoon, rear cattle in the evening, criticize after dinner, just as I have a mind, without ever becoming hunter, fisherman, shepherd or critic.German Ideology, pp. 44–45.
A Utopian Ideal A more utopian ideal cannot be encountered in serious economic literature. While some commentators think that Marx later abandoned this radical view, the evidence supporting such a conclusion is meager. Marx never explicitly repudiated it (although the more outspoken Engels did, for all intents and purposes). Even if Marx had abandoned the view, the basic problems would still remain. How could a communist society abandon the specialization of labor that has made possible the wealth of modem industrialized society and at the same time retain modem mass production methods? How could the communist paradise keep mankind from sliding back into the primitive, highly unproductive, unskilled, low capital intensity production techniques that have kept the majority of men in near starvation conditions throughout most of human history?
The whole question of economic production "beyond the Revolution" was a serious stumbling stone for Marx. He admitted that there would be many problems of production and especially distribution during the period of the so-called "dictatorship of the proletariat." This period is merely the "first phase of communist society as it is when it has just emerged after prolonged birth pangs from capitalist society."Critique of the Gotha Program (1875), in Marx-Engels Selected Works, II, p. 24. This is one of the few places in which Marx presented some picture of the post-Revolutionary world. Marx never expected great things from this society. However, in the "higher phase of communist society," the rule of economic justice shall become a reality: "From each according to his ability, to each according to his needs!''Ibid. This will be easy to accomplish, since the vast quantities of wealth which are waiting to be released will be freed from the fetters and restraints of capitalist productive techniques. As Mises has pointed out, "Tacitly underlying Marxian theory is the nebulous idea that natural factors of production are such that they need not be economized."Ludwig von Mises, Socialism (New Haven: Yale, [1922] 1951; London: Jonathan Cape, 1969), p. 164. Maurice Cornforth, the Marxist philosopher, confirms Mises' suspicion that Marxists see all scarcity as a product of institutional defects rather than as a basic fact of the order of the world in which we live:
The eventual and final abolition of shortages constitutes the economic condition for entering upon a communist society. When there is socialized production the products of which are socially appropriated, when science and scientific planning have resulted in the production of absolute abundance, and when labour has been so enlightened and organized that all can without sacrifice of personal inclinations contribute their working abilities to the common fund, everyone will receive a share according to his needs.Maurice Cornforth, Marxism and the Linguistic Philosophy (New York: International Publishers, 1965), p. 237.
Who Shall Plan? A critical problem for the Marxist is the whole question of communist planning: How is production to be directed? By what standards should the society allocate scarce resources? Whatever Marx's personal dreams were concerning the abolition of scarcity, resources are not in infinite supply. It is because of this very fact that society must plan production. Marx saw this activity as basic to the definition of man, yet this very activity implies the existence of scarcity, a peculiar paradox for Marxism. The fact remains that automobiles do not grow on trees. Someone must decide how many automobiles should be produced in comparison with the number of refrigerators. Planning is inherent in all economic production, and Marx recognized this: "Modem universal intercourse can be controlled by individuals, therefore, only when controlled by all."German Ideology, p. 84. But how can they "all" register their preferences? If there is no private property (and, therefore, no free market economy), and if there is no State planning — no political planning — then who decides which goods are to be produced and which goods are not? Murray Rothbard has stated this dilemma quite accurately:
Rejecting private property, especially capital, the Left Socialists were then trapped in an inner contradiction: if the State is to disappear after the Revolution (immediately for Bakunin, gradually "withering" for Marx), then how is the "collective" to run its property without becoming an enormous State itself, in fact even if not in name? This was the contradiction which neither the Marxists nor the Bakunists were ever able to resolve.Murray N. Rothbard, "Left and Right: The Prospects for Liberty," Left and Right, 1 (1965), p. 8.
The Problem of Scarcity The need to coordinate production implies the existence of scarcities which the production is designed to alleviate. If everyone had all he desired at the moment of wanting it, production would be unnecessary. Raw materials must be fashioned into goods or indirectly into services, and these goods shipped from place to place. Such actions require time (interest on the investment of capital goods), planning (profit for success and loss for failure), and labor (wages). In short, production demands planning. No society is ever faced with the problem "to plan or not to plan." The issue which confronts society is the question of whose plan to use. Karl Marx denied the validity of the free market's planning, since the free market is based upon the private ownership of the means of production, including the use of money. Money, for Marx, is the crystallized essence of alienated production; it is the heart of capitalism's dynamism. It was his fervent hope to abolish the use of money forever."On the Jewish Question," (1843–44), in T.B. Bottomore, Karl Marx: Early Writings (New York: McGraw-Hill, 1964), pp. 34–40. At the same time, he denied the validity of centralized planning by the State. How could he keep his "association" from becoming a State? The Fabian writer, G. D. H. Cole, has seen clearly what the demand for a classless society necessitates: "But a classless society means, in the modern world, a society in which the distribution of incomes is collectively controlled, as a political function of society itself. It means further that this controlled distribution of incomes must be made on such a basis as to allow no room for the growth of class differences."G. D. H. Cole, The Meaning of Marxism (Ann Arbor: University of Michigan Press, [1948] 1964), p. 249. In other words, given the necessity of a political function in a supposedly stateless world, how can the Marxists escape the warning once offered by Leon Trotsky: "In a country where the sole employer is the State, opposition means death by slow starvation. The old principle: who does not work shall not eat, has been replaced by a new one: who does not obey shall not eat."Leon Trotsky, The Revolution Betrayed (1936), quoted by F. A. Hayek, The Road to Serfdom (University of Chicago Press, 1944), p. 119.
Ultimately, the acceptance of the existence of scarcity must be a part of any sane social analysis. In contrast to this Rousseauian-Marxian view of the division of labor stands both the traditional Christian view and the libertarian view of Professor Mises. Men have a natural propensity to consume. If unrestrained, this tendency might result in looting, destruction, and even murder.
The Need to Produce The desire to consume must be tempered by a willingness to produce, and to exchange the fruits of production on a value for value received basis. Each person then consumes only what he has earned, while extending the same right to others. One of the chief checks on men's actions is the fact of economic scarcity. In order to extract from a resisting earth the wealth that men desire, they are forced to cooperate. Their cooperation can be voluntary, on a free market, or it can be enforced from above by some political entity.
Scarcity makes necessary an economic division of labor. Those with certain talents can best serve their own interests and society's interests by concentrating their activities in the areas of production in which they are most efficient. Such specialization is required if productivity is to be increased. If men wish to have more material goods and greater personal services, they must choose occupations in which they can become effective producers. Those who favor a free market arrangement argue that each man is better equipped than some remote board of supervisors to arrange his own affairs and choose his own calling according to his desires, talents, and dreams. But whether the State directs production or the demand of a free market, the specialization of labor is mandatory. This specialization promotes social harmony; the division of labor forces men to restrain their hostile actions against each other if. they wish to have effective, productive economic cooperation.
In this perspective, the division of labor promotes social unity without requiring collective uniformity. It acknowledges the existence of human differences, geographical differences, and scarcity; in doing so, it faces the world in a realistic fashion, trying to work out the best possible solution in the face of a fundamental, inescapable condition of man. In short, the cause of economic scarcity is not the "deformed social institutions" as the socialists and Marxists assert; it is basic to the human condition. While this does not sanction total specialization, since man is not a machine, it does demand that men acknowledge the existence of reality. It does demand that the division of labor be accepted by social theorists as a positive social benefit.Mises, Socialism, pp. 60–62.
A Faulty Premise Anyone who wishes to understand why the Marxian system was so totally at odds with the nineteenth century world, and why it is so completely unworkable in practice, can do no better than examine Marx's attitude toward the division of labor. It becomes obvious why he always shied away from constructing "blueprints for the communist paradise" and concentrated on lashing the capitalist framework: his view of the future was utopian. He expected man to be regenerated by the violence of the Revolution. The world beyond would be fundamentally different: there would be no scarcity, no fighting, and ultimately, no evil. The laws of that commonwealth would not be comformable with the laws that operate under bourgeois capitalism. Thus, for the most part, Marx remained silent about the paradise to come. He had to. There was no possible way to reconcile his hopes for the future with the reality of the world. Marx was an escapist; he wanted to flee from time, scarcity, and earthly limitations. His economic analysis was directed at this world, and therefore totally critical; his hopes for the future were utopian, unrealistic, and in the last analysis, religious. His scheme was a religion — a religion of revolution.
[This article is excerpted from chapter 21 of Human Action.]
The life of primitive man was an unceasing struggle against the scantiness of the nature-given means for his sustenance. In this desperate effort to secure bare survival, many individuals and whole families, tribes, and races succumbed. Primitive man was always haunted by the specter of death from starvation. Civilization has freed us from these perils. Human life is menaced day and night by innumerable dangers; it can be destroyed at any instant by natural forces which are beyond control or at least cannot be controlled at the present stage of our knowledge and our potentialities. But the horror of starvation no longer terrifies people living in a capitalist society. He who is able to work earns much more than is needed for bare sustenance.
There are also, of course, disabled people who are incapable of work. Then there are invalids who can perform a small quantity of work; but their disability prevents them from earning as much as normal workers do; sometimes the wage rates they could earn are so low that they could not maintain themselves. These people can keep body and soul together only if other people help them. The next of kin, friends, the charity of benefactors and endowments, and communal poor relief take care of the destitute.
Alms folk do not cooperate in the social process of production; as far as the provision of the means for the satisfaction of wants is concerned, they do not act; they live because other people look after them. The problems of poor relief are problems of the arrangement of consumption, not of the arrangement of production activities. They are as such beyond the frame of a theory of human action that refers only to the provision of the means required for consumption, not to the way in which these means are consumed. Catallactic theory deals with the methods adopted for the charitable support of the destitute only as far as they can possibly affect the supply of labor. It has sometimes happened that the policies applied in poor relief have encouraged unwillingness to work and the idleness of able-bodied adults.
In the capitalist society there prevails a tendency toward a steady increase in the per capita quota of capital invested. The accumulation of capital soars above the increase in population figures. Consequently the marginal productivity of labor, wage rates, and the wage earners' standard of living tend to rise continually. But this improvement in well-being is not the manifestation of the operation of an inevitable law of human evolution; it is a tendency resulting from the interplay of forces that can freely produce their effects only under capitalism.
It is possible and, if we take into account the direction of present-day policies, even not unlikely that capital consumption on the one hand and an increase or an insufficient drop in population figures on the other hand will reverse things. Then it could happen that men will again learn literally what starvation means and that the relation of the quantity of capital goods available and population figures will become so unfavorable as to make part of the workers earn less than a bare subsistence. The mere approach to such conditions would certainly cause irreconcilable dissensions within society, conflicts the violence of which must result in a complete disintegration of all societal bonds. The social division of labor cannot be preserved if part of the cooperating members of society are doomed to earn less than a bare subsistence.
The notion of a physiological minimum of subsistence to which the "iron law of wages" refers and which demagogues put forward again and again is of no use for a catallactic theory of the determination of wage rates. One of the foundations upon which social cooperation rests is the fact that labor performed according to the principle of the division of labor is so much more productive than the efforts of isolated individuals that able-bodied people are not troubled by the fear of starvation that daily threatened their forebears. Within a capitalist commonwealth the minimum of subsistence plays no catallactic role.
Furthermore, the notion of a physiological minimum of subsistence lacks that precision and scientific rigor that people have ascribed to it. Primitive man, adjusted to a more animal-like than human existence, could keep himself alive under conditions that are literally unbearable to his dainty scions pampered by capitalism. There is no such thing as a physiologically and biologically determined minimum of subsistence, valid for every specimen of the zoological species homo sapiens. No more tenable is the idea that a definite quantity of calories is needed to keep a man healthy and progenitive, and a further definite quantity to replace the energy expended in working.
The appeal to such notions of cattle breeding and the vivisection of guinea pigs does not aid the economist in his endeavors to comprehend the problems of purposive human action. The "iron law of wages" and the essentially identical Marxian doctrine of the determination of "the value of labor power" by "the working time necessary for its production, consequently also for its reproduction,"Cf. Marx, Das Kapital (7th ed. Hamburg, 1914), I, 133. In the Communist Manifesto (Section II) Marx and Engels formulate their doctrine in this way: "The average price of wage labor is the minimum wage, i.e., that quantum of means of subsistence which is absolutely required to keep the laborer in bare existence as laborer." It "merely suffices to prolong and reproduce a bare existence." are the least tenable of all that has ever been taught in the field of catallactics.
Yet it was possible to attach some meaning to the ideas implied in the iron law of wages. If one sees in the wage earner merely a chattel and believes that he plays no other role in society, if one assumes that he aims at no other satisfaction then feeding and proliferation and does not know of any employment for his earnings other than the procurement of those animal satisfactions, one may consider the iron law as a theory of the determination of wage rates.
In fact the classical economists, frustrated by their abortive value theory, could not think of any other solution of the problem involved. For Torrens and Ricardo, the theorem that the natural price of labor is the price that enables the wage earners to subsist and to perpetuate their race without any increase or diminution was the logically inescapable inference from their untenable value theory.
But when their epigones saw that they could no longer satisfy themselves with this manifestly preposterous law, they resorted to a modification of it that was tantamount to a complete abandonment of any attempt to provide an economic explanation of the determination of wage rates. They tried to preserve the cherished notion of the minimum of subsistence by substituting the concept of a "social" minimum for the concept of a physiological minimum. They no longer spoke of the minimum required for the necessary subsistence of the laborer and for the preservation of an undiminished supply of labor; they spoke instead of the minimum required for the preservation of a standard of living sanctified by historical tradition and inherited customs and habits.
While daily experience taught impressively that, under capitalism, real wage rates and the wage earners' standard of living were steadily rising, while it became from day to day more obvious that the traditional walls separating the various strata of the population could no longer be preserved, because the social improvement in the conditions of the industrial workers demolished the vested ideas of social rank and dignity, these doctrinaires announced that old customs and social convention determine the height of wage rates. Only people blinded by preconceived prejudices and party bias could resort to such an explanation in an age in which industry supplies the consumption of the masses again and again with new commodities hitherto unknown and makes accessible to the average worker satisfactions of which no king could dream in the past.
It is not especially remarkable that the Prussian Historical School of the wirtschaftliche Staatswissenschaften viewed wage rates no less than commodity prices and interest rates as "historical categories" and that in dealing with wage rates it had recourse to the concept of "income adequate to the individual's hierarchical station in the social scale of ranks." It was the essence of the teachings of this school to deny the existence of economics and to substitute history for it.
But it is amazing that Marx and the Marxians did not recognize that their endorsement of this spurious doctrine entirely disintegrated the body of the so-called Marxian system of economics. When the articles and dissertations published in England in the early 1860s convinced Marx that it was no longer permissible to cling unswervingly to the wage theory of the classical economists, he modified his theory of the value of labor power. He declared that "the extent of the so-called natural wants and the manner in which they are satisfied, are in themselves a product of historical evolution" and "depend to a large extent on the degree of civilization attained by any given country and, among other factors, especially on the conditions and customs and pretensions concerning the standard of life under which the class of free laborers has been formed."
Thus "a historical and moral element enter into the determination of the value of labor power." But when Marx adds that nonetheless "for a given country at any given time, the average quantity of indispensable necessaries of life is a given fact,"Cf. Marx, Das Kapital, p. 134. Italics are mine. The term used by Marx which in the text is translated as "necessaries of life" is "Lebensmittel." The Muret-Sanders Dictionary (16th ed.) translates this term "articles of food, provisions, victuals, grub." he contradicts himself and misleads the reader. What he has in mind is no longer the "indispensable necessaries," but the things considered indispensable from a traditional point of view, the means necessary for the preservation of a standard of living adequate to the workers' station in the traditional social hierarchy. The recourse to such an explanation means virtually the renunciation of any economic or catallactic elucidation of the determination of wage rates. Wage rates are explained as a datum of history. They are no longer seen as a market phenomenon, but as a factor originating outside of the interplay of the forces operating on the market.
However, even those who believe that the height of wage rates as they are actually paid and received in reality are forced upon the market from without as a datum cannot avoid developing a theory that explains the determination of wage rates as the outcome of the valuations and decisions of the consumers. Without such a catallactic theory of wages, no economic analysis of the market can be complete and logically satisfactory. It is simply nonsensical to restrict the catallactic disquisitions to the problems of the determination of commodity prices and interest rates and to accept wage rates as a historical datum. An economic theory worthy of the name must be in a position to assert with regard to wage rates more than that they are determined by a "historical and moral element." The characteristic mark of economics is that it explains the exchange ratios manifested in market transactions as market phenomena the determination of which is subject to a regularity in the concatenation and sequence of events. It is precisely this that distinguishes economic conception from the historical understanding, theory from history.
We can well imagine a historical situation in which the height of wage rates is forced upon the market by the interference of external compulsion and coercion. Such institutional fixing of wage rates is one of the most important features of our age of interventionist policies. But with regard to such a state of affairs it is the task of economics to investigate what effects are brought about by the disparity between the two wage rates, the potential rate that the unhampered market would have produced by the interplay of the supply of and the demand for labor on the one hand, and on the other the rate that external compulsion and coercion impose upon the parties to the market transactions.
It is true, wage earners are imbued with the idea that wages must be at least high enough to enable them to maintain a standard of living adequate to their station in the hierarchical gradation of society. Every single worker has his particular opinion about the claims he is entitled to raise on account of "status," "rank," "tradition," and "custom" in the same way as he has his particular opinion about his own efficiency and his own achievements. But such pretensions and self-complacent assumptions are without any relevance for the determination of wage rates. They limit neither the upward nor the downward movement of wage rates.
The wage earner must sometimes satisfy himself with much less than what, according to his opinion, is adequate to his rank and efficiency. If he is offered more than he expected, he pockets the surplus without a qualm. The age of laissez-faire for which the iron law and Marx's doctrine of the historically determined formation of wage rates claim validity witnessed a progressive, although sometimes temporarily interrupted, tendency for real wage rates to rise. The wage earners' standard of living rose to a height unprecedented in history and never thought of in earlier periods.
The labor unions pretend that nominal wage rates at least must always be raised in accordance with the changes occurring in the monetary unit's purchasing power in such a way as to secure to the wage earner the unabated enjoyment of the previous standard of living. They raise these claims also with regard to wartime conditions and the measures adopted for the financing of war expenditure. In their opinion even in wartime neither inflation nor the withholding of income taxes must affect the worker's take-home real wage rates. This doctrine tacitly implies the thesis of the Communist Manifesto that "the working men have no country" and have "nothing to lose but their chains"; consequently they are neutral in the wars waged by the bourgeois exploiters and do not care whether their nation conquers or is conquered. It is not the task of economics to scrutinize these statements. It only has to establish the fact that it does not matter what kind of justification is advanced in favor of the enforcement of wage rates higher than those the unhampered labor market would have determined. If as a result of such claims real wage rates are really raised above the height consonant with the marginal productivity of the various types of labor concerned, the unavoidable consequences must appear without any regard to the underlying philosophy.
The same is valid with regard to the confused doctrine that wage earners are entitled to claim for themselves all the benefits derived from improvements in what union officers call the productivity of labor. On the unhampered labor market wage rates always tend toward the point at which they coincide with the marginal productivity of labor. The concept of the productivity of labor in general is no less empty than all other universal concepts of this kind, e.g., the concept of the value of iron or gold in general. To speak of the productivity of labor in a sense other than that of the marginal productivity is meaningless. What these union officers have in mind is an ethical justification of their policies. However, the economic consequences of these policies are not affected by the pretexts advanced in their favor.
Wage rates are ultimately determined by the value the wage earner's fellow citizens attach to his services and achievements. Labor is appraised like a commodity not because the entrepreneurs and capitalists are hardhearted and callous but because they are unconditionally subject to the supremacy of the pitiless consumers. The consumers are not prepared to satisfy anybody's pretensions, presumptions, and self-conceit. They want to be served in the cheapest way.
In 1800, you had to work, on average, one hour to obtain ten minutes of artificial light. Today, this same hour allows you to buy 300 days of light. In 1900, one kilowatt-hour of electricity cost one hour of work. This costs five minutes of our time now. Buying one cheeseburger in McDonald’s required 30 minutes of hard labor in 1950. This same sandwich now costs about three minutes of your life.
According to British intellectual Matt Ridley, this evolution is the ultimate illustration of wealth in modern societies. In his book The Rational Optimist published in 2010, he evaluates our prosperity by outlining the goods and services we can purchase for the same amount of work. Thus, the main objective of economic development is to reduce the amount of time we have to work in order to produce what we need to live.
This discourse may sound surprising in a world where it is often said that “job creation” is the most important goal of economic policy. But a job is not an end in itself. It is just a means to live better. As Milton Friedman reminds us in this conference dedicated to free trade, we don’t want jobs per se but productive jobs: jobs which enable us to consume goods and services we produce at a minimum expenditure of efforts.
In other words, if working is the price we pay to obtain things we want, then economic progress has always consisted of decreasing this price thanks to perpetual productivity growth. This explains our ability to create more wealth with less and less labor, in order to save time for more valuable activities.
Source: Michael Huberman, Chris Minns, The times they are not changin’: Days and hours of work in Old and New Worlds, 1870–2000
There is nothing secret about the factors which enable us to increase our productivity. The first of them is the division of labor and trade. To better understand the interest of trade, one has to imagine how our condition would be without it. A young Youtuber named Andy George tried to experience the production of a sandwich from scratch.
He made a sandwich by using as little trade and processed products as possible. He had to grow vegetables, produce cheese, make bread, all himself. Of course, he “cheated” a little by using kitchen tools and other “capital goods” which would have been unavailable in a total autarkic economy. But even with this, he spent $1,500 and six months of his life to obtain one sandwich.
Today, it costs a few dollars and mere minutes to buy a sandwich in a supermarket. Free trade is precisely what allows us to obtain an ever more optimal division of labor when it is enabled on a large scale. This division of labor allows us to save time while reducing poverty.
The other factors underlying productivity growth are technical progress and capital accumulation. More efficient instruments, tools, and machines reduce the amount of labor necessary to produce goods and services which increase our well-being. However, these phenomena have always been denigrated in the name of “job protection.”
The most famous historical example of such anxiety is the Luddite movement during the 19th century. Workers from the textile industry in England protested against the spread of better machines. People feared this process would lead to more unemployment and poverty. Of course, this alarmist forecast has been invalided by experience, in accordance with the Shumpeterian theory of creative destruction.
Today, there is among workers and politicians a weird nostalgia for old manufacturing jobs, leading businessmen like Bill Gates to suggest the need to “tax robots.” Weird, because those manufacturing jobs have always been considered alienating for the workers, especially by the socialist intelligentsia. One must, therefore, be thrilled at the idea to get rid of laborious tasks to embrace new opportunities offered by an economy driven by services. As no one is going to regret the time where everyone was working in the fields, there is no reason to fear a decline in manufacturing jobs either.
The process of mechanization benefits the whole of society, generating productivity gains which are redistributed through prices decreasing. Like trade, this process allows us to save time and free production factors and other resources which can be allocated to satisfy other needs which were previously nonexistent or too costly to satisfy. This is why there is no correlation between the decline of manufacturing jobs and unemployment in the OECD.
Capital accumulation and technical progress must, therefore, be acclaimed and not demonized. Of course, this accumulation needs strong institutional prerequisites that modern central banks are not going to like: an environment which protects incentives to accumulate savings in order to invest in more efficient capital goods.
Matt Ridley’s book has the merit to refute all pessimistic speeches which promise us an ever more decadent mankind while humanity has never been as wealthy as it is today. This progress does not imply that we must be satisfied with the current situations to the extent that there are still many things to improve.
Besides, Matt Ridley mentions a few exceptions to the tendency for global prices to decrease in some economic sectors like healthcare and education. This may sound surprising until we remember these activities don’t operate under a free trade regime.
As long as I've known him, my father has always been the entrepreneurial type. Even now, in his seventies, he picks up side jobs both to keep busy and to have a little extra spending money.
Throughout my childhood and youth, he had always been an independent insurance broker and salesman. He often employed one or two people to help with the phones and the paperwork. But also often just worked alone.
Growing up, the idea of going to work for a big company for 30 or 40 years, and then retiring to a golf course or rocking chair somewhere, was something completely alien to me. People my age nowadays mostly expect to work full time until age 75 or more. We can forget about pensions and Social Security. But even when a multi-decade retirement seemed like a viable option in the old days, that wasn't something to aspire to in my house.
In short, Dad has always been part of a small minority group in America: people who make their living from running their own business. It is estimated that only about 10 percent of Americans actually make their living from businesses they own. The numbers are higher if we look at people who have some small-business income on the side. But when we're talking about people whose main source of income is their own business, the numbers are smaller.
Not surprisingly, people who are in this minority group have a different way of looking at the world.
For them, there's no boss or manager to complain about when your income isn't as high as you like. If there's not enough money to make payroll at the end of the month, business owners stare failure in the face, and they know they may even be taking some other families down with them. Ultimately, the most important question is always this: How can I get more customers to voluntarily give me their money? A failure to answer this question leads to the failure of one's business.
This may seem like a very simple observation, but for those who are daily forced to ask the question, it leads to a world view that can be quite distinct from millions of other workers who work for wages.
Thinking back on things Dad taught me about business — whether explicitly or by accident — there are three main lessons I was able to learn:
One: Increasing Income Requires More than Just Raising Prices Business owners hate to raise prices. After all, raising prices alienates customers and annoys them. Higher prices mean fewer sales. Sticker shock may be unpleasant for the customer, but it's often even worse for the business owner — who wants to make the sale just as much as the customer wants the product or service.
So how to avoid raising prices? The answer lies in lowering costs of doing business. A business owner can lower costs by finding ways to more cheaply produce the goods and services one sells for a living. This can include finding a cheaper office to lease, or finding lower-cost labor. It might mean finding less expensive delivery trucks or a less expensive healthcare plan for employees.
In the end, if these costs can be brought down, the business owner may be able to lower his prices and out-compete his competition. This will lead to more sales, and higher incomes. Lower costs mean higher net revenues. It also means he can deliver more goods and services to his customers — which enriches everyone.
Some wage earners, of course, often take a different view. For them, getting a higher income often just means hanging around long enough to get a higher salary through seniority. Or they might advocate for a "raise" through government mandated increases on health care spending, or mandated family leave, or a minimum wage.
The larger effects of these latter "strategies," of course, are unemployment and lower real incomes. But wage earners who think they benefit from intervention don't see it this way.
Two: Politicians Only Drive Up Costs This brings us to another important lesson one can learn from business owners: "the government won't help you."
Oh sure, government can help in the very short term if one can convince lawmakers to pass laws that help one's specific business or industry. But such laws don't exist in isolation. Those same legislators are also busy passing laws that benefit the competition and hurt profitability in other ways.
Given the rapid spread of costly government regulations against business in recent years, it's a safe bet that the overall effect of lobbying government for "favors," won't end well.
Overall, government intervention have the result of driving up costs. And then we're back having to raise prices again.
Thanks to labor regulations, environmental regulations, alleged "consumer protection" laws, taxes, tariffs, and a host of other government interventions, business owners are faced with constant upward pressure on the cost of doing business. This leads to declining net revenues, and declining income. It means being able to hire fewer people, and it means less profit available to re-invest in the business.
Wage earners enamored with government intervention, on the other hand, don't care about keeping costs down. They want higher prices — at least for the goods and services in their industry. This is why they like tariffs, immigration controls, and minimum wages. In truth, of course, all of these things just drive up the cost of doing business, leading to fewer hires, and putting downward pressure on wages. But all many wage earners see is the "protection" they receive from an immigration mandate or a higher tariff.
When the government raises tariffs on, say, steel, this raises the prices of delivery vehicles that a business owner must buy to run his business. This means less business growth and fewer hires. The wage earner who favors government intervention, on the other hand, only sees fewer steel imports and more local steel production. "We've saved jobs," the wage earner then says. "Score one for the working man!" In truth, the "working man" now has fewer jobs to choose from overall.
Similarly, our interventionist wage earner doesn't want any new migrant labor to enter the country. As far as they're concerned, there's no need for it. Workers have a tendency to overestimate their own value, and think "those business owners don't need any migrant labor. We're doing a wonderful job!" Many business owners would beg to differ, of course. Many wage earners like to console themselves with a myth that business owners like migrants because they'll work for below-market wages. This is not the case. The fact is that many business owners like migrant labor because they're better workers. After all, many of the native workers can't even pass a drug test.
Again, at the heart of it all is the question business owners must ask themselves daily: how can I convince the customer to voluntarily give me his money?
The focus is on the customer and the public at large, and on contributing to society by delivering a good or service at a price people want. The business owner can't afford to wait around until the locally-born workers sober up enough to become efficient workers. He can't afford to pay more for steel-based products because steel workers can't be bothered with learning skills that are more in-demand.
But tariffs, and immigration controls, and so-called "pro-labor" legislation forces this on the business owners. His customers, however, don't care. They want the same products at the same prices. Or lower ones. The business owner then finds himself constantly trapped between the government's efforts to drive up wages and the cost of doing business — and the demands of the customer.
The business owner, naturally, just wants to please the customer. But governments make this harder every step of the way.
Three: The World Is Changing All the Time And this brings us to the last lesson Dad taught me: "the world is changing all the time, and you'd better figure out how to deal with the change."
For many workers, of course, an ideal employment situation looks something like this: learn some skills, find a nice employer to work for, and then do the same thing for a few decades. Then retire. Maybe in the past some workers even managed to do this.
But it's not the Old Days anymore, and this model of employment simply doesn't work. The worker must be entrepreneurial minded. He must ask himself: how can I deliver something to the customer in a way that makes me valuable?
Moreover, producing value as a worker might be inconvenient. One might have to move to another city to make a living. After all, there's no such thing as a "right" to an employer within a 20-minute commute of where one already lives. If one worked in the West Virginia coal mines for many years — but now the coal mines have become unprofitable thanks to cheap oil and natural gas — it's time to move on. Sitting around and popping painkillers won't solve the problem.
Yes, moving around to find work can be extremely unpleasant. Residential mobility has its downside. But so does poverty and unemployment.
It would be nice if we could return to a time — one that almost certainly never existed — when earning a living required little more than just showing up. But that world has definitely never existed for business owners and entrepreneurs. They've long understood that driving up the cost of living in order to pander to certain groups of wage earners has never made America "great." Unfortunately, these entrepreneurs are very much in the minority, and thus democracy is not on their side.
As the issue of reparations for victims of slavery rages within the Democratic party and on cable news stations, we encounter a common problem: virtually no one is addressing the specifics of how such a reparations effort would be administered. Who exactly would receive these reparations payments? Who would pay them? How would guilt and victimhood be determined? As is usually the case with American policy debates, this "debate" offers little more than an opportunity for pundits and activists to grandstand on related issues such as poverty and race — while avoiding the central topic at hand. Support or opposition then becomes nothing more than a matter of affirming one's political loyalties. The actual issue of reparations — and how they'd be paid out — is mostly ignored. This may be partly because the proposed schemes are nothing that could be properly called reparations at all. They're just an effort to expand government benefits for certain groups.
It is important to remember, however, that there is nothing necessarily problematic about the idea of paying reparations to the victims of a crime. In fact, the idea is essentially pro-private-property because it attempts to repay a victim for property stolen from him or her by another party.
After all, any decent legal system would provide for a victim of kidnapping and forced labor to obtain repayment for the time and labor stolen from him by the kidnapper. As Walter Block writes:
Justified reparations are nothing more and nothing less than the forced return of stolen property — even after a significant amount of time has passed. For example, if my grandfather stole a ring from your grandfather, and then bequeathed it to me through the intermediation of my father, then I am, presently, the illegitimate owner of that piece of jewelry. To take the position that reparations are always and forever unjustified is to give an imprimatur to theft, provided a sufficient time period has elapsed. In the just society, your father would have inherited the ring from his own parent, and then given it to you. It is thus not a violation of property rights, but a logical implication of them, to force me to give over this ill-gotten gain to you.
But here's the rub: in order to do this with an eye toward justice, one must identify specific victims and specific perpetrators. Potentially, as Block suggests, one could envision a legal case in which the heirs of victims would be paid reparations by the heirs of the perpetrators. But again, we still encounter the problem of identifying specific persons (and heirs) involved. Reparations cannot be paid in the abstract, as Chris Calton has noted:
[L]ibertarian ethics are not based on abstract moral claims; they’re based on concretely identifiable property rights. When a violation of a person’s property rights takes place, restitution is the logical means of compensating the victim ...
But in the real world [on matters of slavery] such a claim is incredibly difficult to prove. And failure to prove a legitimate property claim means that the currently recognized property title holds. Anything else would be committing a new injustice to give the illusion of correcting an old one.
Not surprisingly, current advocates for reparations conveniently ignore this last part. For them, a just outcomes can be achieved simple by declaring that one one group of people (the taxpayer) shall pay reparations without any attempt to establish anyone's guilt or innocence in the matter. A program that forces all taxpayers (whether guilty or not of any relevant crimes) to pay reparations to a specific group of people raises several key problems:
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What if a taxpayer is descended from people who didn't even arrive in the country until after emancipation? That is, should a Japanese-American, whose immigrant ancestors arrived in the United States in 1910, be forced to pay reparations? How about descendants of Mexicans who arrived in the US in 1925?
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What if the taxpayer has some ancestors who lived in the US before emancipation and some who arrived here afterward? Would that person's "reparation tax bill" be pro-rated to match the fraction of his ancestry that shared antebellum guilt?
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What if a taxpayer's ancestors were abolitionists who opposed slavery?
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What if a taxpayer has no ancestors who owned slaves?
The (Bad) Economics of Collective Guilt Do not expect any pro-reparations policymakers to even attempt to answer these questions. Naturally, where it is possible to establish a specific person profited from kidnapping and assault (i.e., enslavement) perpetrated by one's ancestors, then it would be potentially ethical and moral to demand reparations in these cases.
To get around these difficulties, many activists may claim that "everyone" is guilty of slavery in an extremely abstract way. For example, perhaps one's ancestor once bought a cheap cotton shirt in 1858, and thus "profited from slavery" by buying inexpensive clothing. Or perhaps one's ancestor (even unwittingly) sold timbers to ship builders who made slaving ships. These arguments rely on the same twisted logic which would have us believe that people who buy gasoline are morally responsible for the brutality of the Saudi Arabian dictators, or that a teenager who smokes a joint is responsible for terrorism like that perpetrated on 9-11. (Yes, the US government created an ad campaign saying exactly this.)
This everyone-is-guilty claim, in fact, is one invented by the slaveowners themselves in an attempt to claim that all Americans — including people who claimed to oppose slavery — somehow directly benefited from slavery, and thus all abolitionists were hypocrites. It was always a desperate and unconvincing argument, but by putting these claims forward, the slavedrivers of old helped pave the way for the modern-day reparations advocates.
In real life, the only people responsible for slavery are the people who directly owned, sold, or traded in slaves; and the politicians who pushed to preserve, spread, or defend slavery through legislation and the state's police powers.
Slavery Suppressed Wages for Many Workers Moreover, many non-slaves can be shown to have been negatively impacted by slavery because it acted to suppress wages. As historian Keri Leigh Merritt describes in detail in her book Masterless Men: Poor Whites and Slavery in the Antebellum South, non-slaveholding whites in the South — who constituted a majority of the population — received far lower wages than they would have had they not been forced to compete with slave labor by a legal system designed to favor slaveowners.
The experience of white laborers illustrates how the benefits of the slave economy were highly concentrated among the wealthy elite. Yes, the chattel slaves themselves fared far worse than any other group. But that doesn't mean most non-slaveowners of the time were — to use the modern parlance — "privileged" by the existence of the slave economy. In practice, it significantly lowered their income.
Ultimately, the issue shouldn't even be regarded as a complicated one. If "reparations" are truly that, then they can only be based on handing over stolen property from the thief to the victim (or their heirs). So long as these specific individuals are not identified, then the policy being discussed has nothing to do with reparations. It's just a wealth redistribution scheme.
In her essay "Redeeming the Industrial Revolution" Wendy McElroy notes how industrialization provided choices to women which had never been available before:
When women had the opportunity to leave rural life for factory wages and domestic work, they poured into the cities in unprecedented numbers. ... The women themselves believed that flight into the city was in their self-interest, otherwise they would have never made the journey or they would have returned home to farm life in disillusionment. To say factory work "harmed" 18th- or 19th-century women is to ignore the demonstrated preference that they themselves expressed. It ignores the voice of their choices; clearly, the women believed it was an improvement.
This view is in contrast to the anti-capitalist view often promulgated by both Marxists and traditionalist conservatives: namely, that people had been far more happy as farm laborers, but that industrialization wrenched people away form their idyllic and bucolic lives, forcing them to degrade themselves with wage work.
The Historical Importance of Wage Work The idea that people — and especially women — rarely left rural occupations willingly for wage work in the cities isn't supported by the historical evidence. Moreover, the trend toward urban wage work is much older and more established in Western European culture than is often assumed.
While many associate urban wage work with only the Dickensian images of nineteenth century factories, Europeans — especially Europeans in northern and Western Europe — began moving to cities in the late Middle Ages, and these trends accelerated over time. By the early modern period, a majority in many areas was engaged in wage labor. According to Tine de Moor and Jan Luiten van Zanden, by the sixteen century, in "Holland and the Guelders River area, up to 60 per cent of the working population were dependent on wage labour." And even before the sixteenth century, in England "being a wage labourer was a normal part of the life cycle of a very large part of the population."Tine De Moor and Jan Luiten van Zanden, "Girl power: the European marriage pattern and labour markets in the North Sea region in the late medieval and early modern period," The Economic History Review, 2009. p.12.
It should not be assumed, however, that this was seen by the workers themselves as a problem. For over a century and a half after the Black Death ended in the mid 14th century, wage rates grew substantially, and for both men and women, "there were a variety of options to choose from." Men had more options than women, but for women, options in various times and places included brewing, silkweaving, spinning, and embroidering.
Life in the city held other attractions as well. According to Retha Warnicke, "Urban women probably had less restrictive routines than their country counterparts, for early sixteenth century visitors were amazed at their freedom. ... While unmarried girls of propertied classes were more closely confined, apprentices and lower-class women seem to have danced in the streets, to have played rather rough games, and to have drunk beer and ale with the men."Retha M. Warnicke, Women of the English Renaissance and Reformation, Praeger Publishers, 1983.
Effects on Marriage, Sex, and Family Formation These new economic realities were important factors in the rise and endurance of what has come to be known as the "western European marriage pattern." Contrary to the commonly held idea that most people in the past married while in their teens or very-early twenties, John Hajnal in 1965 asserted instead that the people of Western Europe, from the Middle Ages onward, often married much later than this, with the average marriage age being 23 or more for women, and 26 for men.This varied within western Europe, but overall, western and northern Europe, and especially the North Sea region, experienced far higher rates of later marriage, and cases of people never marrying at all. The amount of time that passed for Western Europeans between the onset of puberty and the beginning of marriage was longer than in any other region. Western Europe was also notable, Hajnal continued, for the unusually high number of people — sometimes as high as 20 percent — who never married at all. This same marriage pattern did not hold in southern Europe, such as in Sicily, or in eastern Europe. And it certainly wasn't the case in places like China.
The relative ease of finding wage work for young people meant that the opportunity cost of early marriage increased. Young people could hope to experience a period of relative economic independence in their youths that preceded marriage, and many wage workers elected to prolong their pre-marriage working period. For women, this allowed for some economic leverage which afforded more bargaining power in finding a suitable husband, and in establishing financial independence from parents.See De Moor and van Zanden, "Girl power..."
By itself, of course, these economic trends would not have been enough to provide independence for young women. Outside Western Europe, civil governments and social convention placed young women both under the control of parents, and marriage was often a matter of a family handing over the young woman (or girl) to a man who would take her into his home.
By the early modern period, this was not the case in Western Europe. In the Middle Ages, Roman Catholic legal scholars had begun to move toward a "consensus" model of marriage in which the validity of a marriage depended on the consent of both the man and woman. While the opinions of parents remained important, families could no longer impose a marriage contract on spouses. Van Zanden, et al write:
The fact that both the man’s and his future wife’s consent was necessary for marriage meant that it was a contract between ‘equals’ since neither one could impose consensus upon the other partner. This means that in principle the bargaining position of women in such a marriage pattern [i.e., the Western European marriage pattern] is relatively strong: a woman could (try to) select the kind of husband that suited her.Jan Luiten van Zanden, Tine De Moor, Sarah Carmichael, Capital Women: The European Marriage Pattern, Female Empowerment and Economic Development in Western Europe 1300-1800. Oxford University Press. 2019.
In practice, this meant that women could, of their own accord, elect to enter in marriage later, even if their parents wished otherwise. Other legal changes ensued which also guaranteed women better inheritance rights if the woman became widowed. This, in turn, encouraged women to continue with wage work, even after marriage, since she stood to maintain ownership over the fruits of her own labor in case she was widowed.
This relatively advanced degree of equalization was enhanced by earlier changes in thinking about sex within marriage. By the late Middle ages, some Catholic legal scholars began to argue for raising the age of consent for marriage, and for the equalization of the so-called "marital debt." According to James Brundage in Law, Sex, and Christian Society in Medieval Europe:
canonists in this period [i.e., the thirteenth century] also insisted that marriages contracted before the parties reached the age of puberty were not binding unless the individuals were capable both of assenting to marital obligations and of fulfilling them. Alanus favored adopting a further distinction based on Roman law that would have made the validity of marriage depend upon the parties having reached "full puberty" which civil law set at age seventeen, rather than "incomplete puberty," which girls were presumed to reach at twelve and boys at fourteen. Alanus's proposal found little support, and most commentators continued to assert that twelve and fourteen were canonical minimum ages.
Marriage may have been permitted at twelve, but as we have seen, in the following centuries, many couples elected to wait much longer.
Moreover, being built on consent between only the two parties entering into the marriage agreement, married couples enjoyed prerogatives which made them immune to outside demands if they threatened the couple's relationship. Brundage continues:
[A] married serf whose wife demanded that he make love to her at the same time that his manorial lord required his services in the field ought to obey his lord, unless there was imminent danger that his wife might commit fornication. If the wife insisted, however, he was obliged to comply with her demand — the wife's rights took precedence over the lord's. ... The obligation of the marital debt was so serious that in the view of one Anglo-Norman glossator it constituted a telling argument against polygyny, for, he declared, no man could hope to satisfy more than one woman.
Significantly, the woman's right to "intercourse on demand" was legally equal to that of the man's, although canonists admitted women were less likely to invoke this right in disputes. The legal commentary here, however, is illustrative of how the marriage bond could be immune from outside demands — even those of a lord.
This independence for married couples is another characteristic of marriage within the Western European marriage pattern. Outside Western Europe, family relations were far more likely to be subject to outside influence and to fit into what is known as a "joint family" pattern. Joint families occurred when younger married couples within an extended family were expected to remain in the same household as an older patriarch, and subject to his wishes. By the end of the Middle Ages, this sort of family was becoming rare in Western Europe and gave way to the nuclear family in which new married couples were expected to form an entirely new household upon becoming married.
But this could be done only after a woman freely consented to marriage, and if the couple had access to resources which could fund this new household. Urban wage work made this possible for both men and women.
None of this should be interpreted as creating a situation in which women were at a legal advantage over men. That wasn't the case. Compared to women in eastern Europe and China, however, Western European women enjoyed a remarkable level of autonomy.
But even under these conditions, many doubted marriage was always the most desirable option. Roman Catholic views of marriage were less enthusiastic about the institution than was the case outside the west, and this led to fewer marriages in the west, and more warnings about marriage overall. Warnicke, for example, describes "[a] homily of the thirteenth century [which] had warned young girls against marrying a 'man of clay' who would enslave them and force them into the 'drudgery' of housework."Retha M. Warnicke, Women of the English Renaissance and Reformation, Praeger Publishers, 1983. The implication, of course, was that celibacy was preferable to an undesirable man, or, as sixteenth-century poet Anna Bijns put it more forcefully: "Unyoked is best! Happy the woman without a man."
Ultimately, a critical element in all of this was the move toward an economic system that allowed both women and men to establish economic independence through wage work. The changes were quite revolutionary. As De Moor and Van Zanden conclude, the shift to wage work allowed for growth in formal schooling, and for new institutions designed to "address issues of old age or single parenthood."Tine De Moor and Jan Luiten van Zanden, "Girl power: the European marriage pattern and labour markets in the North Sea region in the late medieval and early modern period," The Economic History Review, 2009. p.3 These changes helped set Western Europe apart as it built the foundation for the even greater advances in standards of living which would come latter. It was "the long-term dynamism of this structure which helps to explain the long-term success of this region in the world economy of the early modern period."Ibid., page 4.
Nevertheless, to this day, anti-capitalists both left and right continue to attempt to paint a picture of the past in which urbanization and a move to wage work presented a step down for workers who, we are told, would have preferred to remain in the countryside. Many people who lived during this period would likely have disagreed.
The US unemployment rate stood at 4.3% in July against 4.4% in the month before. The number of unemployed stood at 6.981 million – an increase of 4,000 from June. A relatively low unemployment rate is considered by most experts as an important factor for economic growth.
This way of thinking based on the view that a reduction in the number of unemployed means that more people can now afford to boost their expenditure. As a result, economic activity follows suit. If unemployment is an important driving force of an economy then it is valid to conclude that changes in unemployment are an important causative factor of real economic growth.
In truth, the main driver of economic growth is an expanding pool of real savings rather than the state of unemployment. Fixing unemployment without addressing the issue of real savings cannot lift the pace of economic growth as such.
According to Mises,
"The sine qua non of any lengthening of the process of production adopted is saving, i.e., an excess of current production over current consumption. Saving is the first step on the way toward improvement of material well-being and toward every further progress on this way."Ludwig Von Mises, Human Action, Contemporary Books, p.490.
Real savings fund the enhancement and the expansion of the infrastructure. An enhanced and expanded infrastructure permits an expansion in the production of final goods and services required to maintain and promote individuals life and well-being.
If unemployment was the key driving force of economic growth then it would have made a lot of sense to eradicate unemployment as soon as possible by generating all sorts of employments. For instance, it would make sense to employ people in digging ditches, or various government sponsored activities. Again, the aim is just to employ as many people as possible.
We suggest that such a policy would amount to a waste of scarce real savings. Every activity whether productive or non-productive must be funded. Hence, employing individuals in various non-wealth generating activities would lead to a transfer of real savings from wealth generating activities and thereby undermine the real wealth generating process.
Unemployment as such can be relatively easily fixed if the labor market were to be free of tampering by the government. In an unhampered labor market, any individual that wants to work will be able to find a job at a going wage for his particular skills. Obviously if an individual will demand, a non-market related salary and is not prepared to move to other locations there is no guarantee that he will find a job.
Over time, a free labor market makes sure that every individual earns in accordance to his contribution to the so-called overall “real pie.” Any deviation from the value of his true contribution sets in motion corrective competitive forces.
What matters for the well-being of most individuals is not that they employed as such but the purchasing power in terms of goods and services that they earn. This is the key here. It is not going to be of much help to individuals if what they are earning will not allow them to support their life and well-being. Individuals’ purchasing power is conditioned upon the infrastructure that they operate.
The better the infrastructure the more output an individual can generate. A higher output means that a worker can now command higher wages in terms of purchasing power.
The key for an enhanced and expanded infrastructure is the increase in the pool of real savings. Consequently, any government and central bank policies aimed at lowering unemployment by means of stimulus policies amounts to a policy of redistribution, which leads to economic impoverishment i.e. undermines the living standards of most individuals.
Most Fed policymakers and most economic commentators are of the view that a policy of keeping interest rates at near zero level could be helpful in boosting economic growth by activating the growth rate of banks’ lending.
The artificial lowering of interest rates cannot as such lift the supply of credit if the pool of real savings is in trouble. Banks just fulfill the role of intermediaries — they can facilitate available real savings. However, they cannot create real savings — the key for economic growth. Hence, bank activities as such cannot increase real economic growth.
The only credit that commercial banks can expand is credit out of “thin air,” or inflationary credit. The yearly growth rate of this type of credit stood at 7.8% in June against 17.8% in June last year.
It must be realized that an increase in inflationary credit amounts to an increase in money supply “out of thin air” and hence to a diversion of real savings from wealth producers to non-wealth generating activities — obviously then the expansion in credit because of inflationary credit is bad news for economic growth. Hence, the currently observed decline in the growth rate of inflationary credit implies that the pace of the wealth diversion from wealth generators to non-wealth generators is slowing down.
Furthermore, if the pool of real savings is in trouble then it is quite likely that banks will curtail their credit expansion out of “thin air,” which in turn will undermine the growth rate of the money supply as measured by the AMS.
A possible visible decline in the growth rate of AMS is going to undermine various non-productive i.e. bubble activities. If the percentage of these activities out of total activities is above 50% this could result in a severe economic slump. Note that the slump is because of a likely demise of bubble activities. In this sense, this is good news for the economy since this will strengthen wealth generators and will lay the foundation for a genuine economic growth.
Also, note that the demise of bubble activities is going to be manifested by a sharp increase in the unemployment rate statistic. In this case, policy makers must stay out of the economy and let wealth generators to get on with the job of wealth generation. The build-up in real wealth coupled with a free labor market is going to absorb most unemployed individuals.
Policies aimed at “fighting” a high unemployment rate however, are likely to generate a further economic impoverishment and set in motion a prolonged economic stagnation.
Most commentators are of the view that the key for a healthy economic growth is to keep the unemployment rate at a relatively low level. Once more people employed, this is going to lift overall spending in the economy and consequently general economic activity will follow suit, so it is held. We suggest that unemployment is not the key issue for economic growth. What matters for individuals is not whether they employed as such but the purchasing power of their earnings. The key for this is the infrastructure individuals utilize in the production of goods and services. What permits an increase of the production of goods and services and hence raises people’s living standards is an expansion and the enhancement of infrastructure. What in turn permits this is an expanding pool of real savings. Contrary to popular thinking, the Fed’s and the government policies that are aiming at lowering unemployment do not improve people’s living standards, but on the contrary, they undermine the process of real wealth generation and thus set in motion an economic impoverishment.
As the decline of the Rust Belt became increasingly obvious during the 1980s, protectionists attempted to blame the malaise on too little government protection from foreign competition. Campaigning for the presidency in 1984, Walter Mondale attacked Ronald Reagan for lifting quotas on steel imports, declaring " Reagan’s policies are turning our industrial Midwest into a rust bowl.”
The Rust Belt never recovered its old-time manufacturing base, and it has long been fashionable among protectionists to claim that the modern Rust Belt has become a land of "communities broken technological advances, globalization, and unfettered free trade."
That part about technology is about right. The rest, not so much. For a more complete picture of what has really led to the exodus of jobs from the Rust Belt, we need look no further than the current United Auto Workers strike. As of Thursday this week, "a council of union-hall leaders meeting in Detroit Thursday voted to extend the now 32-day walkout" which is estimated to have already cost GM $2 billion.
It doesn't take a PhD in entrepreneurship to figure out why some manufacturers might be motivated to move far, far away from jurisdictions that encourage this sort of thing. Not surprisingly many manufacturing have indeed moved elsewhere — including within the United States.
Nor did the trend just start in the 1980s. As shown by economist Lee Ohanian
the Rust Belt’s share of economywide jobs declined by about 28 percent between 1950 and 1980 and that its share of manufacturing jobs fell by roughly 34 percent. ... Moreover, the fact that its share of U.S. manufacturing jobs fell so much demonstrates that the Rust Belt’s fate was not simply part of the general decline in U.S. manufacturing. The Belt’s downturn was uniquely deep and long-lived.
In other words, the decline began well before the age of "free trade" agreements and the supposed worldwide takeover by free-market liberals.A report for the Carnegie Endowment notes how Southern states by the 1960s were already building new production facilities that employed less labor and new technology in ways that were not done in the Rust Belt. This is in part due to labor unions who fight labor-saving innovations:Beginning in the 1960s, “mini-mills” sprang up in the South and West of the country. These small, nonintegrated plants leveraged modern technology that required less labor than traditional steelmaking technologies, lower operating costs due to recycling scrap into various rolled steel products, and less restrictive work rules to reap high profits and market share. The plants increased their share of U.S. steel production manifold times in the 1970s and early 1980s, while the industry as a whole suffered a slump in demand. Mini-mill products successfully competed with steel from Ohio’s integrated mills in the construction market. And alternative materials to steel emerged in auto parts, appliances, construction, and consumer products.See: https://carnegieendowment.org/2018/12/10/how-trade-did-and-did-not-account-for-manufacturing-job-losses-pub-77794 And thanks to free trade and free movement of labor within the United states, the trend accelerated into the 1990s. During the ten years from 1996 to 2006, "Michigan lost 83,000 auto manufacturing jobs ... but more than 91,000 new auto manufacturing jobs sprung up in Alabama, Tennessee, Kentucky, Georgia, North Carolina, South Carolina, Virginia and Texas."
And why did rust belt experience such a decline? It was the result of government policy designed to protect both laborers and producers in the region from competition. In "The Decline of the U.S. Rust Belt: A Macroeconomic Analysis" the authors conclude:
The lack of competition in labor markets was closely linked to the behavior of powerful labor unions that dominated the majority of the Rust Belt’s manufacturing industries. In output markets,many of these same industries were run by a small set of oligopolists who, according to numerous sources, actively stifled competition for decades after the end of WWII. ... [S]tate policies favoring labor unions greatly depressed manufacturing productivity over the postwar period."
Productivity lagged precisely because manufacturers — and their workers — didn't have to become more productive. Workers didn't have to change because unions shielded workers from non-union labor. And the producers didn't have to become more productive because they were shielded by import quotas, tariffs, and a general lack of competition from the rest of the world — much of which was devastated by the Second World War.
As a result, these industries became costly and un-competitive both domestically and internationally. Those who suffered were ordinary producers, entrepreneurs, and consumers outside the rust-belt's cozy oligopolies. The the region's influence in Washington, DC meant much of the country was forced to pay for the Rust Belt's lethargy in the form of both higher prices and lower quality.
Naturally, both entrepreneurs and consumers benefited when they were able to slip the Rust Belt straight jacket.
Manufacturers more and more opened up shop in states where unions were politically weaker.
This was apparent by the late 1990s when empirical research by Thomas Holmes, showed
[O]n average, there is a large abrupt increase in manufacturing activity when one crosses a state border from an anti-business state into a pro-business state.
By "pro-business" he means states that have fewer laws and regulations that shield workers and firms from competition.
Thanks to greater international trade post-1980, American manufacturers were able to purchase inputs for their own manufacturing at lower prices. The consumers benefited in turn.
Those on the losing end were were the old, ossified unions and industries left in the Rust Belt where state policies never caught up with reality. Indeed, many of these firms became so inept at serving their customers, some had to turn to government bailouts to stay in business.
In even a moderately free-market, of course, General Motors — and the jobs at GM's plants — shouldn't exist at all. When it went bankrupt in 2009, the US taxpayer paid for a partial government takeover of GM, to the tune of a 50-billion dollar stake in the company. Since then, the Treasury has only managed to recover $38 billion, which means $12 billion will never be recovered at all. But the real cost of the bailout is not just in the cash handed over to GM. The true cost is borne by entrepreneurs and consumers who would have benefited had GM been liquidated and its capital taken over by more competent and productive managers, owners, and employees.
Instead, what the GM bailout gave us was a continuation of the old protectionist policies that make the Rust Belt so costly and unproductive in the first place.
In the minds of protectionists, of course, this is all fine. For them, the old manufacturing economy should be protected, no matter how much that protection means consumers and entrepreneurs are fleeced on a regular basis. This is to be done, we are told, in part to "preserve communities" or shield ordinary people from the alleged tyranny of global competition. But what if GM can't build what people want at a price that makes sense for consumers and entrepreneurs? No problem! Just bail them out using the hard-earned cash of productive people from other industries.
But what is the end game here? Just imagine if steel and auto manufacturers had never had to face competition from other US regions or from foreign manufacturers. Should state and local governments just kept ramping up pro-union and anti-trade policies as Rust Belt manufacturers became less and less productive? The result would have been American manufacturers decades behind global trends, with factories still churning low-quality goods at ever-higher prices.
Globally, of course, this has already been tried. For decades, Latin America was in the thrall of Dependency Theory which suggested governments out to protect their industries so they could "develop" while shielded from foreign competition. In reality, the opposite happened. Protected industries became less and less able to compete or to deliver goods and prices that allowed the rest of the economy to develop. The result was stagnation. India tried a similar "self-sufficiency" experiment. It failed.
The same would have happened in the US had the US stuck with its mid-century protectionism. Fortunately, however, the Sunbelt embraced pro-business, pro-competitive policies that provided an easy escape for many firms from the Rust Belt. Meanwhile, growth in international trade allowed entrepreneurs and small business owners access to less-expensive foreign goods that could be converted into new types of goods, services, and firms.
The death grip of the protected, subsidized, costly, and unproductive Rust Belt had fortunately been broken.
This isn't to say the Rust Belt couldn't modernize if it wanted to. States like Michigan and Ohio could embrace a political economy more geared to serving consumers while allowing more free choice for entrepreneurs, small business owners, and other producers. Instead, these states choose to stick with old pro-union policies that enable walkouts and shutdowns of the sort we now see at work in the UAW strike.
Rust Belt manufacturers can continue to make a good show of things so long as the economy is in growth mode. But as 2009 showed, things are likely to look very different once recession sets in. When that happened, we're likely to see even more union-staffed shops pack up and disappear. Protectionists will probably then say its all the fault of free trade, and that all the country needs is a nice new set of tariffs. But just as trade protection failed to save the Rust Belt decades ago, the same will be true in the future.
It has become nearly commonplace for pundits and politicians to claim that Americans are working more than ever before; that they're working more jobs, and working longer hours — all for a lower income.
During the Democratic debates this summer, for instance, Rep. Tim Ryan of Ohio claimed "the economic system now force[s] us to have two or three jobs just to get by.” Kamala Harris made similar comments.
These claims echo statements from Elizabeth Warren in Alexandria Ocasio-Cortez. In a July 2018 interview, Ocasio-Cortez insisted "Unemployment is low because everyone has two jobs. Unemployment is low because people are working 60, 70, 80 hours a week and can barely feed their family." That same month, Warren stated "people" are "working two, three, or four jobs to try to pay the rent and keep food on the table."
Ocasio-Cortez was the only one in this group unwise enough to claim "everyone" is working incredibly long hours, but the general sentiment is clear enough: a lot of people are working harder and longer just to attain even a basic standard of living.The minimum necessary standard of living necessary to qualify as "decent" or "basic" is never defined.
Fortunately, this doesn't appear to be the case at all. While it is no doubt true that some people work multiple jobs, and many work long hours, it is not clear that this situation is new, or that it has become worse in the past decade.
In fact, in response to Harris's comments, The Washington Post reported that the number of working Americans with more than one job is lower now than the mid-90s:
In all, there are 7.8 million people who hold more than one job — just 5 percent of Americans with jobs . The percentage has been roughly steady since the Great Recession, and in fact is lower than in the mid-1990s, when it hovered around 6 percent.
Nor can we guess from the data as to why people were working more hours or working more than one job.
It cannot be just assumed that people work more only because they risk hunger and eviction from their homes, without those extra hours. After all, there is a growing body of research showing that it is high-income workers who are most prone to working longer hours. For example, according to one study, the authors found
Between 1979 and 2002, the frequency of long work hours increased by 14.4 percentage points among the top quintile of wage earners, but fell by 6.7 percentage points in the lowest quintile.
When we see evidence of rising work hours, it's often a safe guess that among those working more are many higher-wage workers. These people are not working "60, 70, 80 hours a week" to "keep food on the table."
This reverses the status quo of the past (i.e., the 1970s and before) when lower-income workers tended to work more. But, in a 2006 study, economists Mark Aguiar and Erik Hurst studied work and leisure trends over the last 40 years.
They noticed that, in the 1960s, most men—regardless of their education, which serves as a proxy for income—worked the same amount of hours, about 50 per week, and spent about 105 hours dedicated to leisure activities. By 2003, a divergence emerged that mirrored growing income inequality: Men with less than 12 years of education worked, on average, 37.5 hours a week, while more educated (higher earning) men worked 43.4 hours. Both groups gained more leisure time (socializing, watching TV, playing sports), though the less educated group spent about 6 to 7 more hours a week engaged in leisure activities than their more educated (and presumably higher earning) peers.
This, incidentally, has increased measures of income inequality overall. Higher income workers are electing to work more, while middle-and lower income workers opt for leisure. Since government measures of money income can't take into account the benefits of leisure, we then see an increased difference between the two groups.
Another complicating factor is the fact many workers choose to work more when the economy is doing well. Thus, during periods of significant income gains, we might also see increases in working hours.
Using numbers from the University of Groningen, we can see these trends at work in recent decades:
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Overall, annual working hours have declined in recent decades, although we do find that working hours increased — with some ups and downs — from the early 80s to the end of the Dot-Com boom in 2000. This was also a period during which median incomes increased sizably for most groups. The direction of causality probably goes both ways. As job opportunities grew during this time, many people took advantage of the situation and worked longer hours when they could, so as to increase purchasing power and their standards of living. As a result, both personal and household incomes went up. We can see how working hours tend to track with the business cycle using a the Bureau of Labor Statistics' numbers for average weekly hours:
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It should not be assumed that most people were working longer hours simply because they were headed toward the poverty line. Nor can it be assumed workers prefer leisure to additional consumption. One example which suggests the American preference for consumption over leisure is the fact the size of American houses have increased in recent decades even as household sizes have decreased. Presumably a declining household size implies square-footage needs also decline. Yet, many Americans continue to opt for more spacious living quarters, which drives a greater need for more money income, and often longer hours.
Yet, even as working hours have remained largely flat over the past generation, example, real incomes have increased. From 1980 to 2017, the median income increased 14 percent for men, and 24 percent for women. But using weekly average hours numbers from the Bureau of Labor Statistics, weekly average hours increased only 0.5 percent over the same period from 38.5 hours to 38.7 hours.
Since the end of the Dot-Com boom in 2000, of course, median incomes have largely flattened. There was no change at all for men from 2000 to 2017, while the increase for women was 12 percent. But during that time, average weekly hours fell 0.5 percent for women, and fell 3.7 percent for men. Government income statistics, however, measure only money income, so the increased leisure is measured as zero income.
The Larger Trend Overall, working hours haven't moved much in the past forty years — although incomes have increased significantly over that period. But, working hours are still well down from where they were during the first half of the twentieth century — at least for full-time workers. Weekly work hours plummeted from 60 per week in 1890 to 40.25 in 2000, according to calculations by Michael Huberman and Chris Minns.Michael Huberman and Chris Minns, "The times they are not changin’: Days and hoursof work in Old and New Worlds, 1870–2000." Explorations in Economic History, 44 (2007) 538–567. July 2007. Civilian working hours collapsed between 1929 and 1950 due to the great depression and the Second World War, but averages have rarely exceeded 40 hours ever since.
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Researchers Valerie A. Ramey and Neville Francis, on the other hand, contend this drop-off is overstated, and they opt for a different method that shows a decrease of only 16 percent between 1900 and 2005, dropping from 27.7 hours to 23 hours worked per person. (The real median income likely quadrupled during this period.)
But even the more modest gains showed by Ramey and Francis point to broad declines in work time. For example, since 1900, weekly work hours for children in the 10 to 13-year-old range decreased from 5.2 hours per week to zero hours per week in every year since 1940. Weekly work by teenagers (ages 14-17) has also collapsed, dropping from 20 hours per week in 1900 to 2.9 hours in 2005. Meanwhile, Americans are clearly retiring earlier since weekly work in the over-65 population fell from 19.3 weekly hours in 1900 down to 4.2 weekly hours in 2005.Valerie A. Ramey and Neville Francis, "A Century of Work and Leisure, " American Economic Journal: Macroeconomics 2009, 1:2, 189–224.
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This gains appear to have been made possibly by the continued labor of workers in the 25-54 subset. According to Ramey and Francis, these workers have not seen any decline in total hours since 1900, although their standard of living has certainly increased. From 1900 to 2005, weekly hours for the 25-54 year olds increased from 29.6 to 31.3.
Women in the Workforce This increase, however, has been largely fueled by women joining the workforce. Weekly hours worked by males — even in the 24-54 group — declined by 25 percent during the twentieth century, and remains down from the alleged "good ol' days" of the 1950s and 1960s. Declines in working hours for males were even larger in all other age groups.
For women, however, weekly hours worked increased substantially, but mostly for women in the 25-64 range. For women aged 25-54, weekly hours increased from 7.9 in 1900 to 26.1 in 2005.
Seeing this, some bearish observers of American standards of living often claim that everyone is really working much more because prior to the 1970s, women didn't "have to" work. These critics claim that as manufacturing and other presumably high-wage jobs went into decline, women were forced to get wage work to make up the difference.
The problem with this claim, however, is that as women began to join the workforce in larger numbers during the 1950s and 1960s, this did not represent a shift from leisure to work. It only represented a shift from "home production," to production through wage work.In other words, leisure didn't necessarily decline as women entered the workforce. Women simply opted to do different types of work, often because wage work offered more monetary rewards than home production. (Home production includes food preparation, child care, shopping for goods and services, home maintenance, and laundry. This work was overwhelmingly done by women prior to the 1960s.) Thanks to a variety of labor-saving devices, expanded schooling for children, and the introduction of part-time work, women were able to seek money income for themselves and their families without reducing overall leisure time.
For example, for all women over age 14, the reduction in home production was larger than the increase in "hours worked," leaving more time that could be devoted either to leisure or schooling: From 1900 to 2005, home production for women fell from 42.5 hours to 27.6 hours. That's a drop of 14.9 hours. Meanwhile, "hours worked" increased by only 9.3 hours.
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Meanwhile, weekly time spent on home production overall — including both men and women — declined for all age groups except the over-65 group.
As home production and working hours declined, this left more time for leisure and schooling. Thus, Ramey and Francis conclude that even with sizable increases in schooling in recent decades, leisure time increased across all age groups from 1900 to 2005, for men and women combined. The largest gains, not surprisingly, are found with the over-65 age group.
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Moreover, with growing leisure in the over-65 cohort, combined with growing life expectancies, lifetime leisure hours now reached the highest level it's ever been. Ramey and Francis calculate "cumulative lifetime hours of leisure" increased by 11 percent from 1970 to 2000.
Given that working hours as of 2017 were still lower than they were in 2000, it is likely that time devoted to leisure and schooling has increased since then, especially as the population ages and more Americans retire.
Though widely dispensed with in the field of economics, the notion of “wage slavery” is still common among progressives and socialists of many stripes.
It is not uncommon, especially on social media, to run into people insisting that employers are “stealing” part of their labor because the wage they receive from is less than the contribution of their labor to the final value (i.e., selling price) of the finished good.
Below is one example that exemplifies the argument.
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Profit to the employer, the argument goes, is akin to theft from the workers. Profit is “surplus value” created by the worker but taken by the capitalist, they say.
To counter this argument, one must strike at its root: the labor theory of value. An underappreciated essay that provides a satisfying debunking of the labor theory is “Das Kapital: A Criticism,” penned in 1884 by British philosopher and economist Philip Wicksteed.
Use Value and Exchange Value In Das Kapital, and other works, Marx wrestled with what he determined to be two different types of value of a good: use value and exchange value.
Marx described use value as the measure of needs-satisfaction of a good to its user; in other words, its usefulness. But as Marx evaluated the historic transition of economic systems from mostly production for use by the producer himself to widespread systems of production for exchange, he identified what he believed to be a second, and distinct, value of goods: exchange value.
Goods that were produced for the purpose of exchange Marx labeled commodities.
Commodities being exchanged for each other, Marx reasoned, must have some inherent quality making them of "equal" value. It is this supposed equal value that causes them to be traded. In a barter economy, for example, if a pair of shoes is traded for three pounds of beef, the shoes must have an underlying value equal to the three pounds of beef, Marx argued.
Similarly, in a monetary economy, the common measure among different commodities manifests itself in their purchase price. If a dozen apples sells for the same price as a hat, for instance, Marx made the case that there is some common unit of measurement inherent to both goods, causing them to sell at the same price. Or if a new suit sold for the same price as, say, five shovels, then one shovel must be equivalent to one-fifth of a suit.
In short, Marx made the case that commodities that are exchanged are both not identical, meaning they have different physical properties and satisfy different needs, but also that “they are different manifestations or forms of a common something, (else they could not be equated against each other),” as Wicksteed wrote.
Wicksteed further summarized Marx’s description of exchange value: “In other words, things which are exchangeable must be dissimilar in quality, but yet they must have some common measure, by reduction to which the equivalent portions of each will be seen to be identical in quantity.”
Largely because it was the one common denominator in the production of all commodities, Marx identified labor as the common measure giving rise to the exchange value of commodities.
Wicksteed described Marx’s assumption as “setting aside all that gives the wares a value in use,” so that “there is nothing left in them but the single property of being products of labour.” Wicksteed concluded that “According to Marx, then, the (exchange) value of wares is determined by the amount of labour necessary on the average to produce them.”
Surplus Value With the establishment, according to Marx, of labor being the common measure of exchange value among commodities, we must proceed to Marx’s determination that profit represents “surplus value” stolen from the worker.
Marx argued that workers were forced to sell their labor power for less than the value of the commodities they produce with their labor.
Wicksteed summed up Marx’s argument as a transaction in which the capitalist buys the inputs, including labor, at their value, and sells the finished good at its value, “yet more value comes out than goes in.” In other words, the capitalist collects more revenue selling the commodity than he expends in its production.
And if the value of the finished commodity is created by labor, as Marx insisted, then this “surplus value” represents the capitalist appropriating for themselves some of the value created by the workers’ labor.
But what if we could demonstrate that the common measure of exchange value among commodities is not labor? If the value of the finished commodity is determined by something other than labor, then comparing the revenue to the capitalist for the finished good to the amount paid in wages to labor would be rendered irrelevant. Marx’s entire theory would crumble like a house of cards.
Wicksteed is up to the task in his essay, using three key observations.
Value Is Subjective First, Wicksteed informs us that value is not measured by something inherent in each commodity, but rather by the subjective evaluations of the end user. “Now the ‘common something’ which all exchangeable things contain, is neither more nor less than abstract utility, i.e., power of satisfying human desires,” he wrote. “The exchanged articles differ from each other in the specific desires which they satisfy, they resemble each other in the degree of satisfaction which they confer.”
Commodities exchange for like amounts not because they contain the same amount of labor, but because the users value the ends they satisfy with similar intensity.
“If I am willing to give the same sum of money for a family Bible and for a dozen of brandy, it is because I have reduced the respective satisfactions their possession will afford me to a common measure, and have found them equivalent,” Wicksteed wrote.
Marginal Utility A key insight of Austrian economics is the use of marginal analysis and the concept of diminishing marginal utility. In other words, goods are evaluated by the needs-satisfaction of the next unit of that good, not by the value of all existing units of the good. In other words, the more of a good you already possess, the less important the need that the next unit of that good will satisfy.
For instance, if you have one gallon of water, you will use it to satisfy the most important use of water according to your priorities — drinking, for instance. If you acquire a second gallon of water, you will use that to satisfy your second highest priority for water usage, such as bathing. The third gallon of water will satisfy yet a less urgent use for water, and so on.
Obviously, the price you are willing to pay for a third gallon of water will be lower than the price you are willing to pay for that first gallon of water. You value it less not because of the amount of labor required to produce it, but because it has a lower needs-satisfaction, or utility, according to your priorities.
As Wisksteed explained, “Now in a community every member of which possessed two coats already, a further increment of coats would (ceteris paribus) satisfy a less urgent need, possess a less utility, and therefore have a lower exchange value than would be the case in a community each member of which possessed only one coat.”
In sum, the value of coats will have fallen, not because it takes less labor to produce them, but because the utility of the additional units satisfies less urgent needs.
Collectibles Wicksteed closes his argument with an example of exchangeable items whose amount of labor is “powerless to affect.”
These items include “specimens of old china, pictures by deceased masters, and to greater or less degrees the yield of all natural or artificial monopolies. The value of these things changes because their utility changes. And their utility changes … because of a change in the desires to which they minister,” Wicksteed declares.
“I cannot see how any analysis of the act of exchange, which reduces the ‘common something’ implied in that act to labour can possibly be applied to this class of phenomena,” he concludes.
As dismissive as many of us would like to be toward Marx’s labor theory of value, however, it still holds currency among today’s budding socialists. Wicksteed’s essay is a welcome and highly persuasive antidote to the labor theory of value, and it should not be overlooked among the literature debunking Marx. When the labor theory of value is dispatched, Marxism’s primary rallying cry for the “wage slaves” of the world is rendered impotent.
“If steel and iron works, copper mines, and sawmills cannot be operated to their full capacity, the reason can only be that there are not enough buyers on the market ready to purchase their whole output at prices which cover the costs” wrote Ludwig von Mises in Human Action.P. 575.
Chairman Mao’s steel obsessionIn his first Five Year Plan (1953–57) and the Great Leap Forward (1958–60), Chairman Mao steered communist China toward heavy industrial production. He was obsessed with steel production as a measure of a nation’s superiority, and so directed the population of China to produce as much steel as possible.
From 1952 to 1957, steel production tripled, but
this was regarded as inadequate, and during the GLF, the drive for steel turned into an all-consuming obsession, and the entire country was mobilized for this goal, despite the rhetoric of “simultaneous development of industry and agriculture.”Alfred L. Chan, Mao's Crusade, p. 158.
During the Great Leap Forward, the Chinese resorted to backyard blast furnaces to further increase steel production, using any fuel they could get their hands on, including the wood from front doors, furniture, and coffins. They melted personal items like cookware and bicycles when they ran out of iron ore. The metals produced by such methods were weak and useless for construction; in some regions the metal content didn’t even qualify it as steel, but low quality pig iron.
The consequences for Mao’s steel obsession was more than just low-quality output: a death toll in the tens of millions as people starved due to the lack of food production or were killed or worked to death by the state.
Steel production and economic calculationSuch dire consequences are avoided in market economies because the production of goods, including capital goods, is strictly regulated by consumer demand. The production of one good is only profitable to the extent that the revenues exceed the costs of production, both of which depend on consumer demand.
Revenues are obviously dependent on what consumers are willing to pay for certain quantities of a good, but the costs of production are also totally dependent on consumer demand. The prices of factors of production are bid up to their anticipated discounted marginal revenue product (ADMRP). That is, the extra revenue the entrepreneur expects to be able to earn due to the employment of the factor, due allowance being made for time preference. And this extra revenue, of course, is dependent on the consumer.
To increase the production of a good, the specific factors of production must be bid away from other lines of production. The price offered must exceed what all other entrepreneurs think the factor’s ADMRP is.
Forcing an entire country to redirect almost all productive efforts and resources toward the production of steel means that the costs of production would rise to outrageous levels as factors are bid away from increasingly important uses. The forgone production of other goods is automatically taken into account in the market economy where entrepreneurs rely on economic calculation to make production decisions. Without market prices, like in Mao’s China, such economizing mechanisms are absent.
Trump takes a cue from MaoThe reason this is important today is because Trump has promised “bold action” against steel imports — steel imports from China, coincidentally — presumably to show off American “industrial might,” according to this article. Trump also believes action against imports will provide “a source of well-paying blue-collar jobs.” Mao would be proud.
In April, as a clever ruse to justify new protectionist measures, Trump instructed his administration to investigate the national security implications of importing steel. An announcement about the outcome of this charade is expected any day now.
Steel isn’t a great source of jobsThis comes at the same time economic commentators are fretting over workers being displaced by automation in many industries. Steel production is not immune; a certain plant in Austria needs “just 14 employees to make 500,000 tons of robust steel wire a year.” This, of course, does not include all of the labor required in earlier stages of production. The trend is magnificent all the same, even though the majority opinion is that it’s bad.
The lamenters don’t seem to understand that increased productivity in one industry frees up resources and laborers for other industries, and, since increased productivity means increased real wages, demand for goods and services will increase as well. They seem to have a nonsensical apocalyptic view of a fully automated future with piles and piles of valuable goods everywhere, but nobody can enjoy them because nobody has a job. I invite the worriers to check out simple supply and demand analysis and Say’s Law.
Technological innovations that displace workers are great because total production of all goods can increase, not just the goods in the newly advanced industry. Or, since we also enjoy leisure time, it means that our work weeks can get shorter without sacrificing our livelihoods. Of course, all changes in the economy require some reshuffling of resources, and in the case of temporarily displaced workers, that can be a difficult process (especially if those workers have to overcome and navigate through labor market interventions). But the positive effects of increased productivity undeniably rule out any proposal to stop or hinder such advancements through government force.
How much steel we produce should be determined by consumersEven Mao would have invited technology to increase steel production, even if it meant that the backyard smelters were no longer needed to produce steel (assuming he could magically realize this without market prices). Those laborers could have been directed to agriculture and perhaps millions of people would have been saved from starvation. Technology, however, will never make socialism workable. Without market prices, even super-high-tech societies as seen in Star Trek or Star Wars can only work in fiction. Technology merely allows us to produce more. Deciding what to produce, in what quantities, using what resources, and all of the myriad production decisions requires market prices and economic calculation.
We have regressed to obsessing over domestic steel production, using industrial might, national security, and jobs as justification, but all three are flimsy when compared with what trade and market economies can accomplish. Neither Trump nor Mao can replace the sovereignty of the consumer over production.
The real bosses, in the capitalist system of market economy, are the consumers. They, by their buying and by their abstention from buying, decide who should own the capital and run the plants. They determine what should be produced and in what quantity and quality. Their attitudes result either in profit or in loss for the enterpriser. They make poor men rich and rich men poor. They are no easy bosses.Ludwig von Mises, Bureaucracy, pp. 20–21.
When unions are in their justifying-their-existence mode, they quickly turn to false claims, such as asserting that higher union wages benefit other workers. In fact, unions actually actually reduce the availability of union jobs, and force workers elsewhere, increasing labor supply and decreasing wages for those jobs. At a more basic level, though, they justify themselves as exemplars of the right of freedom of association, so that anything which restricts them violates freedom of association.
The union version of freedom of association is that workers are free to associate with them, under unique government-granted privileges, including monopoly representation of all workers based on a one-time election. As Brenda Smith of the AFT put it, “Exclusivity for a union with majority support…is democracy…It allows employees to select their representative freely, without coercion from the employer. It allows them to amplify their voice through collective action under our constitutionally protected right to freedom of association.” But such union freedom of association rights are sharply inconsistent with universal rights to freedom of association.
Others’ freedom of association are violated in multiple ways. Such union “rights” take away workers’ freedom to be associated with a different union, their freedom to choose alternative forms of group representation, such as voluntary unions, and their freedom to represent themselves in negotiations with employers. It takes away workers’ freedom to associate with non-union employers or to resolve workplace issues directly with them, rather than forcing arrangements exclusively though the union. It takes away the freedom of employers to not associate with unions or to solely employ workers who have no union involvement. In addition, in heavily unionized industries, it undermines consumers’ freedom to associate with (buy from) lower cost, non-union producers (or, as taxpayers, to have government services provided at a lower cost in the case of government unions), if they choose. In other words, unions’ freedom of association means one-way freedom for them to coerce others. Those who don't wish to associate with unions, however, are not entitled to this same freedom.
However, a fundamental or inalienable human right must be one that all possess. If one party’s exercise of a right prevents a second party’s exercise of the same right, it is a special privilege given only to the first party, not a right. If the second party is required to accept the first party’s offer of association on the terms they offer, the second party is not free to choose his associations. Freedom of association would be a right of the first party, but denied to the second party. A fundamental right to freedom of association can only mean freedom to associate with those who also choose to associate with us — i.e. voluntary association on both sides. That includes freedom to refuse association with others against one’s will.
Consider a suitor asking to marry a woman. His freedom of association does not deny her equal freedom. She can say no. Similarly, a student application to a university does not compel that university to accept the student. But the union version of freedom of association would require those they want to associate with to say yes.
Unions manage to divert attention from the logical contradictions in their version of freedom of association by focusing discussion on living up to the freedom of association of those workers who choose to be members. That often goes a long way to defuse opposition, in the name of democracy. However, careful thinking about that reasoning reveals it as perhaps the strongest argument against union freedom of association claims.
As James Sherk has documented, not a single current worker in many unions ever voted to select that union, and vanishingly few current workers voted for them in other instances. In fact, it may be the case that very few unions have been voted for by a majority of the current workers they represent. That destroys any claim that the union advances current workers’ freedom of association.
How could that be? Labor law and interpretation requires only a majority those who voted (not a majority of the number of workers) in a single certification election to allow unions to impose exclusive union representation on all workers. After that, no further elections need ever be held. So new workers need never be given a vote on the union. This is also true for anyone who changes their mind after their initial vote.
As a consequence, when a workplace was unionized long ago, virtually no one who voted in the certification election still works there. How many of its current workers voted for UAW unionization of GM’s Michigan plants in 1937, 80 years ago? How many current government union workers voted to certify their unions in the 1960s and 70s? Zero, in many cases. Current union members have therefore often had no effective input into who represents them. Consequently their unions even deny freedom of association to the majority of their current members, the one group one whose freedom of association could plausibly be consistent with union freedom of association claims. That is, unions’ destruction of others’ freedom of association extends to almost everyone, so that such a right cannot justify their current existence and power.
Some of restrictions of others’ freedom of association due to unionization could be addressed by having regular union certification elections. Alternatively, decertification elections are also possible. But unions have managed to hamstring both options both options, revealing that workers’ freedom of association was more an intended victim than their intended motive.
Union members can try to change their union representatives in internal elections, if they are unhappy with the current leadership. But even if they successfully oust their leadership, since the local is subordinate to the national union, the national union can neutralize it by putting the local under its trusteeship and leadership. That is, even when unhappy workers “win,” they can lose.
What about regularly occurring union certification elections, an idea supported by more than 4 out of 5 union households? Unions never offer such an option voluntarily, which, itself, says a great deal about their commitment to their workers’ freedom of association. However, such elections can be forced on them. Wisconsin not long ago mandated that government unions face re-certification elections. Many did not even file for re-election, revealing how badly they knew they had served members. In other cases, membership fell dramatically (AFSCME membership fell by over half) or dues were cut to maintain membership, as unions had to finally compete for members.
Decertification as an option is also strewn with restrictions. It requires signatures from 30 percent of all employees in a unit (versus 50 percent of votes cast for certification, which can be a far lower hurdle), within a one-month time frame which is only open once every three years, and those signatures cannot be gathered while employees are being paid or in work areas. Further, union members who support decertification are commonly expelled from the union (but not relieved of paying for their “representation services”) giving them still less freedom of association. Such restrictions show why decertification is such a faulty escape valve for poorly represented workers.
In sum, not only do unions deny rather than empower members’ freedom of association, they have made it all but impossible to reverse the abuse. As John Ransom summarized it, “for unions, freedom of association means workers are given only one representative, one association, one, non-dissenting voice carefully following the party line.” Given the importance FOA for all, (as Alexis de Tocqueville wrote, “The most natural privilege of man, next to the right of acting for himself, is that of combining his exertions with those of his fellow creatures and of acting in common with them. The right of association therefore appears to me almost as inalienable in its nature as the right of personal liberty. No legislator can attack it without impairing the foundations of society”), this reveals unions’ freedom of association claims as almost totally baseless. Consequently, not only is unions’ supposed justification in freedom of association (which Thomas Jefferson recognized provided “the guarantee to everyone of a free exercise of his industry and the fruits acquired by it”) false; it is a contradiction in terms.
In 1944 Professor Hayek emphasised that sustainable employment depends on an appropriate distribution of labour among the different lines of production. This distribution must change as circumstances change. Sustain able employment thus depends on appropriate changes in relative real wage-rates. If established producers—both unions and capitalists—prevent such relative changes from becoming effective, there follows an unnecessary rise in unemployment. Sustainable employment now depends on successfully tackling these established labour and capital monopolies. - Sudha R. Shenoy
One of the obstacles to a successful employment policy is, paradoxically enough, that it is so comparatively easy quickly to reduce unemployment, or even almost to extinguish it, for the time being. There is always ready at hand a way of rapidly bringing large numbers of people back to the kind of employment they are used to, at no greater immediate cost than the printing and spending of a few extra millions. In countries with a disturbed monetary history this has long been known, but it has not made the remedy much more popular. In England the recent discovery of this drug has produced a somewhat intoxicating effect; and the present tendency to place exclusive reliance on its use is not without danger.
Though monetary expansion can afford quick relief, it can produce a lasting cure only to a limited extent. Few people will deny that monetary policy can successfully counteract the deflationary spiral into which every minor decline of activity tends to degenerate. This does not mean, however, that it is desirable that we should normally strain the instrument of monetary expansion to create the maximum amount of employment which it can produce in the short run. The trouble with such a policy is that it would be almost certain to aggravate the more fundamental or structural causes of unemployment and leave us in the end in a position worse than that from which we started.
MaladjustmentsThe main cause of this kind of unemployment is undoubtedly the disproportion between the distribution of labour among the different industries and the rates at which the output of these industries could be continuously absorbed. At the end of this war we shall, of course, be faced with a particularly diffi cult problem of this character. In the past the best known disproportion of this kind and, because of its connection with periodical slumps the most important, was the chronic over-development of all the industries making equipment for use in further production.
It is more than likely that these industries, because of the intermittent way in which they operated, have always had a larger labour force than they could continuously employ. And while it is not diffi cult to create by means of monetary expansion in those industries another burst of feverish activity which will create temporarily conditions of ‘full employment’, and even draw still more people into those industries, we are thereby making more diffi cult the task of maintaining even employment. A monetary policy aiming at a stable long-run position would indeed deliberately have to stop expansion before ‘full employment’ in those industries had been reached, in order to avoid a new maldirection of resources.
Though this is the most important single instance of structural maladjustments responsible for unemployment, the recurrent depression constitutes only part of our problem. The hard core of persistent unemployment is an even greater menace and is due largely to maldistributions of a different kind which monetary policy can do even less to cure. We must here face the fact that the problem of unemployment is in the last resort a wage problem—a fact which used to be well understood but which a conspiracy of silence has recently relegated into oblivion.
Wages and MobilityDemand shifts constantly to new articles and industries, and the more rapidly we advance the more frequent such changes become. Though the increased speed of change will necessarily swell the numbers temporarily out of work while looking for a new job, it need not cause an increase of lasting unemployment, or a reduction in the demand for labour as a whole. If movement into the advancing industries were free, they should readily absorb those laid off elsewhere. The new development which more and more prevents this, and which has become the most serious cause of protracted unemployment, is the tendency of those established in the progres sing industries to exclude newcomers. If the increase in demand in those industries leads, not to an increase of employment and output, but merely to an increase of the wages and profits of those already established, there will indeed be no new demand for labour to offset the decrease. If every gain of an industry is treated as the preserve of a closed group, to be taken out almost entirely in higher wages and profi ts, every shift of demand must add to the lasting unemployment.
The very special and almost unique experience of this country in the years after the pound was artificially raised to its former gold value has produced a fallacious preoccupation with the general wage level. Where such an artificial increase of the national wage level is the cause of unemployment, monetary manipulation is indeed the simplest way to cure it. Such a situation, however, is altogether exceptional and not likely to occur, except in consequence of currency fluctuations.
In normal times employment depends much more on the relation between wages in the different industries—or, rather, on the degree of mobility which the wage structure allows. There is little that monetary policy can positively achieve in this connection. Indeed, if Lord Keynes is right in emphasising that workers attach more importance to the nominal figure of their money wages than to real wages, any attempt to meet the problems of wage rigidity by monetary expansion can only increase the immobility which is the real trouble: if money wages are maintained in declining industries the workers will become even more hesitant to leave them in order to break the protective walls sheltering the privileged groups in the advancing industries.
The struggle against unemployment is in the last resort the same as the struggle against monopoly. Need it be added that on this fundamental issue we are not moving in the right direction? Or that it would be a poor service to the community to pretend that there is an easy way out which makes it unnecessary to face the basic difficulties?
Dangers AheadIt is easy to see how much more serious our problems must become if the present fashion should prevail and if it should become the accepted doctrine that it is the task of monetary policy to make good any harm done by monopolistic wage policies. Even apart from the effect on those responsible for wage policy, who are thus excused the responsibility for the effect of their action on employment, the one-sided emphasis on monetary policy may not only deprive our efforts of full results, but also produce effects as unlooked for as they are undesirable.
While it is true that an intelligent monetary policy is a sine qua non of the prevention of large-scale unemployment, it is equally certain that it is not enough. Short of universal compulsion we shall never lastingly conquer unemployment until we succeed in breaking the rigidities of our economic system which we have allowed the monopolies of capitalists and labour to create. To forget this and to trust solely to monetary policy is the more dangerous as it may succeed long enough to make it impossible to try anything else: the more we are induced to delay the more difficult adjustments, because for the time being we seem to be able to keep things going, the greater the sector of our economic system will grow which can be kept going only by the artificial stimulus of credit expansion and ever-increasing Government investment.
It is a path which would force us into progressively increasing Government control of all economic life, and eventually into the totalitarian state.
Excerpt from A Tiger by the Tail
In the past, a few brave iconoclasts have taken exception to the treatment Ebenezer Scrooge of A Christmas Carol has received from his critics.
While a fictional character created by Charles Dickens, Scrooge has become, in the minds of many, a representative of the imagined miserly financiers who serve as caricatures of capitalists everywhere.
This has led some defenders of markets to step in and offer a defense of Scrooge.
Butler Shaffer writes that Scrooge is one of "the true heroes of the time of which [Dickens] wrote, namely, the industrialists and financiers who created that most liberating epoch in human history: the Industrial Revolution."
And Michael Levin avers: "Dickens doesn't mention Scrooge's satisfied customers, but there must have been plenty of them for Scrooge to have gotten so rich."
Levin sensibly points out that so long as Scrooge wasn't in the business of using violence, everyone remained free to refuse to do business with him. Since Dickens gives us no reason to suspect that Scrooge did ever actually rob anyone, we can conclude that everyone who did business with him did so voluntarily.
However, if we're going to look on every non-coercive act as morally neutral or as even laudable — and employ that standard to evaluate Scrooge's actions — then we also ought to extend the same courtesy to all of Scrooge's detractors. When Scrooge's associates engage in non-violent attempts to convince Scrooge to be more charitable — if we are to be consistent — we can't judge those actions to be any more unsavory than Scrooge's many non-violent business dealings.
After all, no human being in A Christmas Carol forces Scrooge to do anything. Some people — such as Scrooge's nephew Fred — engage him in conversations that Scrooge finds unpleasant. Scrooge tells those people to go away and they do. Some men ask him for a charitable donation. Scrooge refuses, and he is free to do so. While it is acknowledged that Scrooge pays taxes to the British state, no one in the story advocates for higher tax rates, or demands that Scrooge pay more in taxes. Taxation is not presented as the solution to the central problems of the story.
If this were the case, of course, things would be different. We would then be forced to defend Scrooge from the grasping hand of the state and its cheerleaders. But A Christmas Carol is not a fable about the need for a social democratic paradise. The central problem of the story lies not in convincing Scrooge to give up the pursuits of a businessman. There are numerous businessmen in the story portrayed as good men. Scrooge's nephew is a apparently a middle-class businessman, and is hardly a member of the proletariat. Scrooge's former employer Fezziwig is portrayed as a hero. The reader is not led to believe that Scrooge ought to be forced by the state to disband his firm and open up a homeless shelter instead. On the contrary, the story's narrative is driven by attempts to convince Scrooge to voluntarily embrace the spirit of Christmas, for his own sake as much as anyone else's. Moreover, those who attempt to push Scrooge in this direction never employ anything other than non-violent social pressure.
Scrooge Doesn't Understand How Wages Work At the one point where Scrooge overtly claims he is being coerced — when he says Cratchit's paid day off is akin to "picking a man's pocket" — Scrooge is either lying or deluding himself. In no way whatsoever is Cratchit picking Scrooge's pocket. Scrooge is free to terminate Cratchit at any time and pay him nothing at all. Scrooge is free to hire someone else to do Cratchit's job.
Scrooge, however, voluntarily agrees to give Cratchit the day off. In spite of his whining about paying Cratchit too much, Scrooge's actual actions suggest that Scrooge realizes that Cratchit is probably not all that easy to replace after all.
If Scrooge really believes that his pocket is being picked, then he is far less observant and intelligent than his defenders give him credit for.
The only characters in the story that might be described as forcing Scrooge to do anything are the supernatural creatures who reveal facts — facts that Scrooge never disputes as inaccurate — about Christmases, past, present, and future.
Supernatural creatures, however, don't lend themselves to the social-science tools we have for analysis. It's best here to just fall back on the reasoning of Scrooge himself who assures us that such beings are more likely the result of "a slight disorder of the stomach." They're "an undigested bit of beef ... a fragment of an underdone potato." There is "more of gravy than of grave" about these spirits.
Thus, if Scrooge imagines that he's been coerced into traveling the netherworld to see "shadows" of other Christmases, we really ought to take Scrooge's advice and assume these are more likely simply the figments of Scrooge's imagination. Does not Scrooge wake up in his own bed after all these alleged adventures with spirits?
Thus, in the end, what we do find is that Scrooge has not been subjected to violence or coercion by those who encourage him to take a more favorable view toward Christmas.
Scrooge's Bruised Ego What does convince Scrooge to celebrate Christmas is his own active imagination — which is blamed on these spirits — which shows to Scrooge that he could effect positive changes in his world by voluntarily giving away some of his money. Secondly, Scrooge is disturbed by the realization that he is deeply unpopular and will not be missed when he dies. Whether it's a dream or some sort or delirium, Scrooge imagines that unless he does something new, he will be quickly forgotten upon his death. His ego is deeply wounded when he "sees" his nephew's Christmas party where the revelers have fun at Scrooge's expense.
Scrooge is horrified by this realization, and contrary to his protests that he is above matters such as popular opinion, it turns out that Scrooge actually desires public acceptance and appreciation a great deal. His lofty attitude toward his fellow Londoners, it turns out, is just an act to hide his pitiable cravings for social approval.
When Scrooge does finally change his tune on Christmas, it's not due to any new law, any new tax, or anything he has been forced to do. No, Scrooge is instead motivated by a desire for popularity, human companionship, and by the pricking of his conscience in regards to the poverty of families such as those of Bob Cratchit.
Other motivations are possible as well, of course. It could be that Scrooge realized the apparent silliness of a very old man with no heirs continuing to save a large percentage of his earnings as if he still had decades to live.
But whatever the reason, the fact remains that when Christmas morning arrived, Scrooge was perfectly free to carry on as he always had. He was still free to fire Bob Cratchit, make no charitable donations, and continue to save money at a rapid rate.
On the other hand, if Scrooge did change his mind based on the actions of others, we can only conclude these actions where the rhetorical efforts employed by Scrooge's nephew Fred, by Bob Cratchit, and by the men from the widows-and-orphans fund. None of these men employed coercion or deception, and thus, we cannot say that Scrooge requires a "defense" from these people at all. As a taxpayer, he remains a victim of the state, of course. But that hardly sets him apart from countless other Englishmen of the time, many of whom were presumably still willing to make merry on Christmas.
Nearly 40 years ago, Lawrence Reed published “Seven Fallacies of Economics” in The Freeman in which he noted that much of what the public believes about economics is fallacious because most people fail to understand simple opportunity cost. Given the current trends in political economy, it is a sad certainty that most if not all of the fallacies Reed listed are still taken as economic truths in much of the academic world.
Fast forward to former Secretary of Labor Robert Reich, who now is a public policy professor at the University of California-Berkeley, and is a popular economic and political commentator on the Internet, making good use of Youtube for his lessons accompanied by board drawings. As if to counter Reed’s economic wisdom, Reich presents his “7 Incredibly Clear Economic Fundamentals.” As one will see, they not clear, they are not “economic fundamentals,” and they certainly do not represent sound economic thinking.
Reich has a brief video in which he confidently presents his “truths” to an audience I suspect believes everything he says. For those that don’t watch the video, he lays out his seven points as follows:
Workers are consumers. Consumer spending accounts for 70% of all economic activity in the United States. People at the top spend a much smaller portion of their incomes than people in the middle class and below. So when most of the economic gains go to the top, there's not enough purchasing power to keep the economy moving. Which means that in order to have sufficient demand for goods and services, a larger share of total income has to go to the middle class and the poor. Which requires a higher minimum wage, a bigger earned income tax credit, lower taxes on the middle class and the poor financed by higher taxes on the wealthy, and stronger unions capable of negotiating higher wages. These don't hurt the wealthy. It's not a zero sum game. In fact, the wealthy will do better with a smaller share of a rapidly growing economy than they're doing now with a large share of an economy that's barely growing at all.While I will deal with each point individually, it is important to note what is missing: any mention of capital. To a leftist like Reich, capital is irrelevant and actually could be harmful, since it replaces labor, and “everyone knows” that labor is the source of all value. Furthermore, Reich would argue that capital formation doesn’t come about without spending, and unless authorities find a way to “put money into the hands of the middle class,” there won’t be enough economic activity to justify any investments into capital. In other words, there will be no capital investment if there is no demand for capital, and there will be no demand for capital if people don’t have enough money to spend. (No doubt, in discussions about capital, he would refer us to Thomas Piketty, who claims that returns to capital favor the wealthy and increase the rich-poor pay gap, so that over time, capital actually shrinks the economy unless government intervenes and re-distributes income from the wealthy to everyone else.)
The way to bring about more spending, reasons Reich, is to transfer money from the wealthy to the middle and lower-income groups, since people in those categories likely will spend a higher percentage of their income on consumption goods rather than investment (or, horrors, luxury) goods. At the same time, the government should ensure that minimum wages are raised to higher levels and that labor unions should be made stronger through government policies that protect them.
So, we have the following scenario: In order to keep the economy moving, workers must be paid higher wages brought about by higher minimum wage laws and expansion of labor union power. Reich claims that these points are “incredibly clear economic fundamentals.”
The only “incredibly clear” fundamental point is this: Robert Reich is as clueless on economics as he ever has been in his public career, and one is amazed that he did not do more damage to the U.S. economy while he was at the Department of Labor. There likely is not enough cyberspace to deal with all of the fallacies that Reich has presented, but I shall evaluate what I can.
Reich: Higher Costs Equal More WealthA number of economists, including some on the Mises page and others elsewhere, have exposed the “consumer spending comprises 70 percent of the economy” fallacy, and those knowledgeable about Austrian Economics are familiar with Say’s Law. Thus, I will not plow that ground, since others, such as Ludwig von Mises, have expertly explained how production is what drives consumption.
Reich’s thesis is that because workers are consumers, they would benefit from having higher rates of pay, since higher pay would raise their incomes, and higher incomes would allow for them to engage in more consumption, making them better off. Any of us that have received substantial pay raises will agree that economically speaking, we were better off afterward (ceteris paribus).
In watching his video, one gets the sense that Reich truly believes that if only – IF ONLY! – business owners understood what he understands: Paying high wages leads to higher wages and higher wages lead to more prosperity. All it takes to kick start the economy into overdrive is for government to mandate higher wages, empower labor unions to force up pay for their members, and have government impose massive taxes on high income earners along with returns to capital. The only way for business owners to experience universal prosperity is for the government to force up their production costs.
While Reich’s policy demands resonate with people on the left, his ideas are utterly fallacious. First, and most important, Reich claims that if government engages in policies that increase costs of production, businesses will prosper more. Thus, higher costs lead to higher overall incomes and more prosperity.
The supposed example of this principle in action is the famous Henry Ford decision to nearly double the pay of many of his workers from about $2.50 to $5 a day, an action which some claim created the American middle class. As the argument goes, Ford raised the wages of his workers to that they could afford to purchase the products they were making. The real reason for his actions – to reduce crippling costs associated with high turnover rates in his workforce – often is lost in the “virtuous circle” of higher pay and higher consumption rhetoric.
To put it more succinctly, we are supposed to believe that by nearly doubling his labor costs, Ford magically produced a nationwide change in consumer behavior. One can make the argument that if business owners could double their other factor costs, then the economy would boom, since all factors of production produce incomes for someone.
(Yes, I am sure that Reich proponents would argue that other factors tend to be owned by rich people, and rich people don’t spend enough on consumption goods to keep the economic “circular flow” in place. We easily debunk that argument by noting that development of all factors of production require work forces comprised mostly of employees earning regular middle-class and below incomes, and the bulk of the factor payments would go to them.)
Such backward reasoning stands in contrast to the simple fact that when producers see increases in relative costs over time, the supply of goods they create will fall, not rise, which means real prices of those goods will go up. Thus, Reich turns everything we know about productivity on its head by claiming that government policies that increase factor costs and shrink production is the key to having a strong economy.
Economies grow when entrepreneurs are able to move resources from lower-valued to higher-valued uses, a process that over time reduces the real costs to society and permits the economy to produce more wealth. Forcing up costs through government edicts does not create more wealth; it destroys wealth.
My second point deals with the heart of Austrian Economics: economics is part of human action. In the Austrian paradigm, individuals act purposefully using means to achieve desired ends. In a market setting, individuals engage in production and exchange in order to meet their needs and improve their current lot in life. People produce in order to consume, and they consume because they perceive that doing so makes them better off.
Contrast that concept to the Reich economic paradigm: people produce in order to get money and they consume in order to clear the shelves of goods so that they can produce more goods to have incomes, which then allow them to consume further, keeping the cycle going. Austrians hold that people produce to consume; Reich believes that people consume in order to produce in order to consume in order to produce, and so on. Economic exchange is nothing more than a glorified hamster wheel that has no real purpose other than to repeat itself.
Reich is not giving “economic fundamentals,” since there is nothing “economic” about what he is saying. His pronouncements are not about economics at all, but rather are anti-economic, clarion calls to destroy wealth and spread poverty.
Back in 2013, I shared a poll to see who people would pick as their “favorite political cartoonist.” Michael Ramirez currently has the lead, which doesn’t surprise me when you look at options (here, here, here, and here) I provided.
But if there was a prize for the most depressingly accurate political cartoon, he also would win the prize for his depiction of what happens when state and local politicians “negotiate” compensation packages for bureaucrats.
Simply stated, politicians have a giant incentive to provide lavish benefits to interest groups that then recycle some of the loot back to elected officials in the form of campaign contributions.
But the real key to the scam is that the bill gets imposed on future generations.
The American Legislative Exchange Council has a must-read report on the giant funding gaps that this has produced in the pension plans for state and local government bureaucrats.
If net pension assets are determined using more realistic investment return assumptions, pension funding gaps are much wider than even the large sums reported in state financial documents. Unfunded liabilities (using a risk-free rate of return assumption) of state-administered pension plans now exceed $6 trillion—an increase of $433 billion since our 2016 report. The national average funding ratio is a mere 33.7 percent, amounting to $18,676 dollars of unfunded liabilities for every resident of the United States. …the personal share of liability for every resident in each state, an indicator of the severity of the taxes to be borne now or in the future by each taxpayer for promises made but not funded. In Alaska, each resident is on the hook for a staggering $45,689, the highest in the nation. Connecticut, Ohio, Illinois, and New Mexico follow for the five highest per person unfunded pension liabilities.
This map is the most important takeaway from the report. It shows which states have the highest per-capita unfunded liabilities.
I’m not surprised to see Alaska, Illinois, Connecticut, and New Jersey near the bottom of the rankings. All of them were choices in my poll on which state was “most likely to collapse.”
But perhaps New Mexico, Hawaii, and Ohio should have been on that list as well.
For further background on the issue, here are some passages from a pension primer published by Forbes.
Years ago, as an actuarial student, …I remember…first, the eye-popping idea that state constitutions promised state and local employees that they could keep their existing benefits, not just for past service accruals, but for all future years of employment; and, second, the notion that it was generally accepted for public plans to be un- or underfunded… this is the story that’s repeated over and over again. Pensions are made more generous — with high accrual rates, low retirement eligibility ages, generous cost of living provisions — as a means of providing more generous compensation to state and local employees, without actually needing to pay anything from the current year’s budget. Costs are deferred until well after current legislators have themselves retired. …pension debt is even worse than ordinary state debts, for instance, bond issues for building up infrastructure. Pension debt is nothing other than borrowing to pay for present-day employee salaries.
In other words, bureaucrat pensions are a scam, an opportunity for politicians to buy off a powerful voting bloc today while imposing the bill on the future.
Bureaucrats are making out like bandits, as the New York Times recently reported.
A public university president in Oregon gives new meaning to the idea of a pensioner. Joseph Robertson, …who retired as head of the Oregon Health & Science University last fall, receives the state’s largest government pension. It is $76,111. Per month. That is considerably more than the average Oregon family earns in a year. Oregon — like many other states and cities, including New Jersey, Kentucky and Connecticut — is caught in a fiscal squeeze of its own making. Its economy is growing, but the cost of its state-run pension system is growing faster. More government workers are retiring, including more than 2,000, like Dr. Robertson, who get pensions exceeding $100,000 a year. The state is not the most profligate pension payer in America… “It’s an affront to everybody who pays taxes,” said Bruce Dennis, a retired carpenter from outside Portland who earned a $54,000-a-year pension by swinging a hammer for 45 years. No one gives him extra money.
But there’s a problem with this scam.
As Margaret Thatcher famously noted, sooner or later you run out of other people’s money.
And we’re getting to that point, as illustrated by this article for the Wall Street Journal. It cites what’s happening on the state level in Connecticut.
Connecticut has just 31.7% of what it needs to pay its employees’ future retirement benefits, according to state financial reports. A fund for teachers has 52.3%. Together, that adds up to more than $37 billion in unfunded pension liabilities, or about $10,300 per Connecticut resident. Connecticut’s unfunded pension liabilities resulted from nearly 40 years of politicians making promises about benefits without adequately funding them, according to a 2015 study by the Center for Retirement Research at Boston College.
And it gives an example of trouble at the local level from a city in Michigan.
East Lansing, home of Michigan State University…is struggling with almost $125 million in unfunded pension and retiree health-care liabilities, has been cutting services… East Lansing asked MSU to pony up $100 million over 20 years to help shore up the city’s underfunded pension plan. The alternative, the city said, was asking voters to approve a 1% income tax that would hit university employees and working students. After negotiations went nowhere, the city brought the income-tax proposal before voters in a referendum last November. …On Nov. 7, East Lansing residents shot down the income-tax referendum, forcing the city to debate what services to cut to save money for the pension obligations. …The city hopes to shed another 17 police and fire positions over the next two years… Altmann suggested a long list of potential cuts to make more room in the budget for increased pension payments: closing the fire station on MSU’s campus, shuttering the city’s pool, aquatic center, dog park and soccer complex, suspending bulk leaf pickup and plowing of public sidewalks and ending annual jazz, folk, film and art festivals.
This is not going to end well.
And the problem seems to get worse every year.
Doesn’t matter who is slicing and dicing the data. The numbers always look grim.
When the next recession hits, many of these simmering problems are going to explode.
P.S. In addition to extravagant and unfunded pensions, don’t forget that state and local bureaucrats (and their federal cousins) are overpaid.
P.P.S. And if you don’t believe that they’re overpaid, then please explain why they don’t voluntarily leave their jobs for positions in the economy’s productive sector?
P.P.P.S. Also keep in mind that there are negative macroeconomic repercussions when bureaucrats are overpaid.
Publicado originalmente en International Liberty.
Recognizing the calamitous erosion of incentives that would be brought about by a straight guaranteed-income plan, some reformers have advocated what they call a "negative income tax." This proposal was put forward by the prominent economist, Professor Milton Friedman, of the University of Chicago, in his book Capitalism and Freedom, which appeared in 1962. The system he proposed would be administered along with the current income tax system.
Suppose that the poverty-line income were set at $3,000 per "consumer unit" (families or individuals), and suppose that the negative income tax (which is really a subsidy), were a flat rate of 50%. Then every "consumer unit" (this is the statisticians' technical term) whose income fell below $3,000 would be paid a subsidy of, say, 50% of the difference. If its earned income were $2,000, for example, it would receive $500; if its earned income were $1,000 it would receive $1,000; if its earned income were zero it would receive $1,500.
Professor Friedman freely concedes that his proposal, "like any other measure to relieve poverty … reduces the incentives of those helped to help themselves." But he argues that "it does not eliminate that incentive entirely, as a system of supplementing incomes up to some fixed minimum would. An extra dollar earned always means more money available for expenditure."
It is true that a "negative income tax" (which is a misleading name for a tapered-off guaranteed income) would not have quite as destructive an effect on incentives as would a straight guaranteed income. In fact, some thirty years ago I put forward a similar proposal myself. This appeared in an article in The Annalist (a weekly then published by the New York Times) of January 4, 1939. I suggested what I called a "tapering subsidy," a relief payment that would be reduced by only $1 for every $2 the relief recipient earned by himself.
But I abandoned the proposal when I realized that it leads straight into a dilemma, which is precisely the dilemma of the negative income tax: either it is altogether inadequate at the lower end of the scale of self-earnings, or it is unjustifiably excessive at the higher end. Either it must pay only half an adequate income (by its own definition of "adequate") to a family that earns no income, or it must pay nearly twice an adequate income to a family that already earns an almost adequate income.
Trick names of this sort corrupt the language and confuse thought. It would hardly clarify matters to call a handout a "negative deprivation" or having your pocket picked "receiving a negative gift."
The problem that the NIT (negative income tax) evades or glosses over is the problem of the individual or family with zero income. If an individual were given only $300 (the figure suggested in Professor Friedman's original proposal in 1962), nobody would regard this as nearly adequate — particularly if, as Professor Friedman also proposed, NIT were made a complete substitute for all other forms of relief and welfare. If the NIT payment for a family of zero income is set at $1,700, no advocate of the guaranteed income would regard it as adequate to live on in "decency and dignity." So if the NIT were ever adopted, the political pressure would be irresistible to make it provide the minimum "poverty-line" income of $3,400 even to families with zero earned income.
The basic subsidy would therefore be as great as under the straight guaranteed income. But if the basic subsidy under NIT to a family with zero income were $3,400, then under the NIT 50% "incentive" formula that family would continue to get some government subsidy until its annual income reached $6,800. But this is higher than the median family income for the whole country in 1963 ($6,637). In brief, this would be fantastically expensive.
In addition, it would raise serious problems of equity. When the subsidized family was earning $6,798 income it would still be getting a $1 subsidy. When it earned $6,802 would it fall off the gravy train entirely, and have to wait until its income fell below $3,400 before it could get on again? And what about the family that had been earning $3,402 all along, and had never got on the gravy train?
The arithmetical dilemma of the NIT has received so little attention from its advocates that I hope I may be forgiven another illustration to show the paradoxical way in which it would work out.
An orthodox relief program would pay the jobless head of a family, say, $60 a week. If he then started to earn something, he would be paid simply the difference between that amount and $60. Under the NIT principle a man who was earning nothing would also receive a relief payment of $60 a week. But if he then earned $30 a week on his own he would still get a $45 payment (reduced by only $1 for every $2 earnings), bringing his total income to $75 a week. If he was later able to earn the full $60 for himself he would still be getting a relief payment of $30 a week, bringing his total income to $90. In fact, even if he succeeded in bringing his total self-earnings to $118 a week he would still be getting $1 a week in relief payment.
He would then be almost twice as well off economically as he would if he had always earned enough — say, $61 a week — not to get on the relief rolls in the first place. This would be clearly inequitable to those who had never got on relief. The incentive to get on relief, and certainly to stay on relief, would be enormously greater under NIT than under the present system.
If we tried to escape this result by using the NIT formula only in part — taking the man off relief, say, as soon as he was himself earning $60 a week — we would get an even more absurd result. When he was earning $58 a week under NIT, he would still be getting $31 a week from the government, making his total income $89. But if he then made the mistake of earning only $2 more he would end up with a net loss of $29 a week. So the negative income tax would create a tremendous positive incentive to get and stay on relief permanently.
The NIT scheme could avoid this preposterous result by paying a man with zero income only, say, $30 a week, or only half as much as its own proponents assume that he needs to live on.
Some readers may think that the dilemma of the NIT scheme can somehow be escaped by changing the percentage by which the relief payment or income supplement is reduced as self-earnings increase. But any change from 50% one way or the other merely reduces one horn of the dilemma by making the other more formidable. If we reduce the government supplement by 75 cents for every dollar of self-earnings, we correspondingly reduce or destroy the incentive for such self-earnings. If we reduce the government supplement by only 25 cents for every dollar of self-earnings, we increase the recipient's incentive to work and earn, but at the cost of a still more expensive program for the government, and we increase the recipient's positive incentive to stay on relief because of the violent drop in his income if he ever got off.
If we make the scheme more complicated by, say, reducing the relief payment or supplementary income by only 25 cents for every dollar of the recipient's first $10 of weekly self-earnings, 50 cents for every dollar of his second $10 of self-earnings, and 75 cents for every dollar of his third $10 of self-earnings, or some similar scheme, we merely pile up an administrative nightmare without solving the basic dilemma. The unpalatable truth seems to be that whenever we try to "increase incentives" by reducing a relief payment by less than a dollar for every additional dollar of self-earnings, we solve an immediate problem at the cost of building up a bigger problem for the future.
In addition to the special dilemma it presents, the NIT retains the fatal defects of the straight guaranteed income. By neglecting the careful applicant-by-applicant investigation of needs and resources made by the ordinary relief system, it would open the government to massive fraud, chiseling, and swindling. And it would also, like the guaranteed income, force the taxpayers to support a man regardless of whether or not he was making any sincere effort to support himself. The government is bound to get into insoluble difficulties if it starts to give money away to "the poor" not only without making sure that they are poor but without bothering to find out the reasons why any particular individual or family is poor.
Excerpted from Fallacies of the Negative Income Tax. Published in Man vs. the Welfare State.
Chinese billionaire and Alibaba founder Jack Ma predicted this week that in 30 years, people will be working less than they do now. According to NBC:
I think in the next 30 years, people only work four hours a day and maybe four days a week," Ma said. "My grandfather worked 16 hours a day in the farmland and [thought he was] very busy. We work eight hours, five days a week and think we are very busy.
Only time will tell if Ma's prediction will come true in terms of its time horizon and magnitude. But, if the next century follows the pattern of the previous 150 years, we could be looking at continued and significant reductions in total working hours.
Some of the biggest gains are likely to occur in the so-called "developing" world, but even the wealthy West will continue seeing gains in this regard.
For many Americans, at least, comments such as Ma's may cause them to scoff. Remarkably, there still seems to be an impression among many Americans that they are working more hours now than their grandparents did.
This is no doubt true in some specific cases, but overall, the evidence is clear that people are working less now than in the past — with the possible exception of the recent past.
RELATED: "Why Median Incomes Probably Are Really Going Down" by Ryan McMaken
Indeed, if we look at a survey of total work hours conducted by Michael Huberman and Chris Minns, we find that total hours worked have declined over time: In Germany, for example, total hours worked declined from 3,284 hours in 1870 to 1,463 in 2000. In Canada, work hours declined over the same period from 2,845 to 1,835.
The overall trend is obvious, and only the US, Sweden, and Canada in this sampling of wealthy countries shows something other than a decline from 1980 to 2000.
From 1870 to 2000, though, total work hours declined 39 percent in the United States, 40 percent in the UK, and 55 percent in Germany. While it's certainly possible that some Americans may be working as much as their great-grandparents did, overall, most of us work more than a third less time than they did.
Other studies have shown similar results.
A study by Thomas Juster and Frank Stafford found that from 1965 to 1981 in the United States, “market work” hours per week fell from 51.6 hours to 44 hours for men. For women, market work rose from 18.9 hours to 23.9 hours. We would expect an increase for women over this period as women began to take on “market work” at higher rates than before.
In yet another study by Mary Coleman and John Pencavel, average weekly hours worked fell for white men from 44.1 hours in 1940 to 42.9 hours in 1988. It fell for white women from 40.6 hours to 35.5 hours over the same period.
Most of this is thanks to continued progress in worker productivity. As recently explained by Ferghane Azihari at mises.org, we work less for more as capital accumulates and productivity increases. Obviously, our standard of living is higher than that of our grandparents. And yet, we're often working less than they did.
Moreover, our working lives are shorter than they were in the past.
As Ben Powell has noted in his work on sweatshops on child labor, wealthy countries enjoy the luxury of eschewing child labor nearly in its entirety.
By the 20th century, thanks to increasing productivity, the adult members of the family could produce enough to pay a family's expenses in a way that had previously required the labors of the family's 9- and 10-year-olds.
It was the decline in the necessity of child labor that made it feasible to finally outlaw child labor in wealthy countries in the early 20th century. Today, labor activists act as if laws prohibiting child labor were the primary driver behind its decline. It is far more likely that the opposite is true. Namely, that growing wealth allowed for more children to leave the work force. Prohibitions on child labor came only in the late stages of this process. Powell writes:
In the United States, Massachusetts passed the first restriction on child labor in 1842. However, that law and other states’ laws affected child labor nationally very little. By one estimate, more than 25 percent of males between the ages of 10 and 15 participated in the labor force in 1900. Another study of both boys and girls in that age group estimated that more than 18 percent of them were employed in 1900. Economist Carolyn Moehling also found little evidence that minimum-age laws for manufacturing implemented between 1880 and 1910 contributed to the decline in child labor. Similarly, economists Claudia Goldin and Larry Katz examined the period between 1910 and 1939 and found that child labor laws and compulsory school-attendance laws could explain at most 5 percent of the increase in high school enrollment. The United States did not enact a national law limiting child labor until the Fair Labor Standards Act was passed in 1938.
And it wasn't just the children who could afford the new luxury of skipping work.
During this same period, the elderly were beginning to enjoy for the first time the concept of "retirement."
Just as increased productivity had made it possible too for parents to more fully support children with just the parents' wages, so too did these gains make new pension programs — both governmental and private — possible.
After all, the implementation of the Social Security tax would have been a political impossibility in an earlier era when workers were living closer to subsistence levels.Thanks to the surpluses made possible by growing industrialization and worker productivity, both private corporations and government agencies could skim off enough of the surplus to hand over to elderly workers who were no longer actively producing products or services as wage workers.
Thus, like child workers, elderly workers began to disappear from the work force. W. Andrew Achenbaum writes:
In [1890 in the US], about two-thirds of men aged 65 and older were still in the labor force — roughly the same proportion found today in developing countries such as Brazil and Mexico. By 1920, that number had dropped to 56 percent, and by 1940 it was down to 42 percent. Today it is 27 percent.
Today, not only are modern workers working fewer hours in many cases, but fewer workers are necessary to produce at least as much wealth.
This is especially true when we look at these trends through a global lens. As Powell notes, child labor declines the most in those countries where real incomes exceed $12,000. The number of countries where this is actually the case continues to expand, just as poverty continues to decline in the developing world.
This isn't to say that everything is perfect or getting better in every way all the time. Nor are the gains evenly distributed. The relative gains being made in recent decades in the US, for example, have slowed as American workers face greater competition from foreign workers. Gone are the days when the European competition was still digging out from the rubble of World War II. Also gone are the days when workers in places like India and Latin America and China offered little competition. Workers in the Western world once had a near monopoly on the benefits of being in close proximity to the world's best capital — including the best factories and the best technology. Nowadays, highly advanced production facilities can be found throughout the world. And this means more competition from workers in the developed world.
Moreover, continued interventionism by states and their central banks may drive real wages and economic opportunities down. Regulations on starting small business, coupled with central-bank driven asset price inflation, takes its toll on earnings for many throughout the world.
Time will tell if war, unchecked government regulation, or some other disaster may put a halt to the declines in working hours we've been enjoying for so long. If not, our descendants will be looking back on five-day weeks the way we should now look at the grueling work schedules of our great-grandparents.
On the matter of immigration, even many commentators who support ease of migration also oppose the extension of government benefits to immigrants.
The idea, of course, is that free movement of labor is fine, but taxpayers shouldn't have to subsidize it. As a matter of policy, many also find it prudent that immigrants ought to be economically self sufficient before being offered citizenship. Switzerland, for instance, makes it harder to pursue citizenship while receiving social benefits.
This discussion often centers around officially recognized "welfare" and social-benefits programs such as TANF and Medicaid. But it is also recognized that taxpayer-funded benefits exist in the form of public schooling, free clinics, and other in-kind benefits.
But there is another taxpayer-supporter program that subsidizes immigration as well: the US military.
Government Employment for Immigrants Last week, the AP began reporting that "the US Army is quietly discharging Immigrant recruits."
Translation: the US government has begun laying off immigrants from taxpayer-funded government jobs.
It's unclear how many of these jobs have been employed, but according to the Department of Homeland security, "[s]ince Oct. 1, 2002, USCIS has naturalized 102,266 members of the military."
The Military as a Jobs Program Immigrants, of course, aren't the only people who benefit from government jobs funded through military programs.
The military has long served as a jobs programs helpful in mopping up excess labor and padding employment numbers. As Robert Reich noted in 2011 , as the US was still coming out of the 2009 recession:
And without our military jobs program personal incomes would be dropping faster. The Commerce Department reported Monday the only major metro areas where both net earnings and personal incomes rose last year were San Antonio, Texas, Virginia Beach, Virginia, and Washington, D.C. — because all three have high concentrations of military and federal jobs.
He's right. While the private sector must cut back and re-arrange labor and capital to deal with the new economic realities post-recession, government jobs rarely go away.
Because of this, Reich concludes "America’s biggest — and only major — jobs program is the U.S. military."
Reich doesn't think this is a bad thing. He only highlights the military's role as a de facto jobs program in order to call for more de jure jobs programs supported by federal funding.
Given the political popularity of the military, however, it's always easy to protect funding for the military jobs programs than for any other potential jobs programs. All the Pentagon has to do is assure Congress that every single military job is absolutely essential, and Congress will force taxpayers to cough up the funding.
Back during the debate over sequestration, for example, the Pentagon routinely warned Congress that any cutbacks in military funding would lead to major jobs losses, bringing devastation to the economy.
In other words, even the Pentagon treats the military like a jobs program when it's politically useful.
Benefits for enlisted people go well beyond what can be seen in the raw numbers of total employed. As Kelley Vlahos points out at The American Conservative, military personnel receive extra hazard pay "even though they are far from any fighting or real danger." And then there is the "Combat Zone Tax Exclusion (CZTE) program which exempts enlisted and officers from paying federal taxes in these 45 designated countries. Again, they get the tax break — which accounted for about $3.6 billion in tax savings for personnel in 2009 (the combat pay cost taxpayers $790 million in 2009)– whether they are really in danger or not."
There's also evidence that military personnel receive higher pay in the military than do their private-sector counterparts with similar levels of education and training.
Nor do the benefits of military spending go only to enlisted people. The Pentagon has long pointed to its spending on civilian jobs in many communities, including manufacturing jobs and white-collar technical jobs.
This, of course, has long been politically useful for the Pentagon as well, since as political scientist Rebecca Thorpe has shown in her book The American Warfare State, communities that rely heavily on Pentagon-funded employment are sure to send Congressmen to Washington who will make sure the taxpayer dollars keep flowing to Pentagon programs.
Whether you're talking to Robert Reich or some Pentagon lobbyist on Capitol Hill, the conclusion is clear: the military is both a jobs program and a stimulus program. Cut military spending at your peril!
Military Spending Destroys Private Sector Jobs The rub, however, is that military spending doesn't actually improve the economy. And much the money spent on military employment would be best spent on the private, voluntary economy.
This has long been recognized by political scientist Seymour Melman who has discussed the need for "economic conversion," or converting military spending into other forms of spending. Melman observes:
Since we know that matter and energy located in Place A cannot be simultaneously located in Place B, we must understand that the resources used up on military account thereby represent a preemption of resources from civilian needs of every conceivable kind.
Here, Melman is simply describing in his own way what Murray Rothbard explained in Man, Economy, and State. Namely, government spending distorts the economy as badly as taxation — driving up prices for the private sector, and withdrawing resources from private sector use.
Ellen Brown further explains:
The military actually destroys jobs in the civilian economy. The higher profits from cost-plus military manufacturing cause manufacturers to abandon more competitive civilian endeavors; and the permanent war economy takes engineers, capital and resources away from civilian production.
But, as a classic case of "the seen" vs. "the unseen," it's easy to point to jobs created by military spending. How many jobs were lost as a result of that same spending? That remains unseen, and thus politically irrelevant.
Military fan boys will of course assure us that every single military job and every single dollar spent on the military is absolutely essential. It's all the service of "fighting for freedom." For instance, Mitchell Blatt writes, in the context of immigrant recruits, "I’m not worried about the country or origin of those who are fighting to defend us. What matters is that our military is as strong as it can be." The idea at work here is that the US military is a lean machine, doing only what is necessary to get the job done, and as cost effectively as possible. Thus, hiring the "best" labor, from whatever source is absolutely essential.
This, however, rather strains the bounds of credibility. The US military is more expensive than the next eight largest militaries combined. The US's navy is ten times larger than the next largest navy. The US's air force is the largest in the world, and the second largest air force belongs, not to a foreign country, but to the US Navy.
Yet, we're supposed to believe that any cuts will imperil the "readiness" of the US military.
Cut Spending for Citizens and Non-Citizens Alike My intent here is not to pick on immigrants specifically. The case of military layoffs for immigrants simply helps to illustrate a couple of important points: government jobs with the military constitute of form of taxpayer-funded subsidy for immigrants. And secondly, the US military acts as a job program, not just for immigrants but for many native-born Americans.
In truth, layoffs in the military sector ought to be far more widespread, and hardly limited to immigrants. The Trump Administration is wrong when it suggests that the positions now held by immigrant recruits ought to be filled by American-born recruits. Those positions should be left unfilled. Permanently.
Luxembourg citizens voted in an election last year. But as The Economist has noted, "48% of those who live there were not allowed a ballot-paper."
This is because a great many immigrants live in Luxembourg, but few of them quickly become citizens — which means few can vote.
According to the Migrant Integration Policy Index (MIPEX):
LU remains one of the most exclusive national democracies in the developed world, with the largest share of adults disenfranchised in national elections. According to 2013 OECD data, after 10+ years in the country, LU citizenship had been granted to only around 20% of the foreign-born, including among the non-EU-born, who are generally most likely to naturalise and see the benefits.
Not surprisingly, The Economist thinks this is a bad thing.
Nevertheless, few are claiming that immigrants are treated poorly in Luxembourg. Because of Luxembourg's small size and integration into the European economy, Luxembourg is quite open to migrant workers, both from neighboring countries, and from further abroad.In Luxembourg, as in much of the EU, naturalization law is a two-tier affair. Migrants who are already EU citizens have easier access to naturalization than non-EU citizens from places like Africa and Asia.
Nevertheless, immigrants continue to flock to the country, and make up approximately 45 percent of the population. Moreover, 160,000 workers commute daily into Luxembourg from France, Belgium, and Germany — "Luxembourgers are only the majority in their country when the sun goes down." In recent decades, many have become permanent residents.
Aware of complaints about a lack of more widespread suffrage in Luxembourg, voters in 2015 were given an opportunity to vote on expanding voting rights to foreigners in a referendum. 80 percent rejected the idea.
It should not be surprising, though, that many Luxembourg citizens are concerned that a sizable expansion of citizenship could bring about radical changes in Luxembourg through demographic shifts. A key strategy in slowing and managing this situation — while still allowing migration — is limiting access to citizenship.
A Case Study in Citizenship vs. Residency The case of Luxembourg is helpful in illustrating how naturalization and immigration are two different phenomena. Clearly, experience suggests Luxembourgers are open to inviting in immigrants and working with them in a variety of economic ventures. Many live permanently in the country. The immigrants enjoy property rights and legal due process. A lack of access to political participation does not imply that it is legally or morally permissible in Luxembourg to treat immigrant property rights as forfeit. After all, immigrants have usually entered into legal contracts with employers and landlords to secure income, housing, and other types of property. Abolishing these legal rights could be disastrous for the local economy.
Moreover, the fact that the economy in Luxembourg depends on this openness to immigrants means the voting citizens are incentivized against enacting laws that might severely limit immigration or which would induce immigrants to avoid the country. Many Luxembourg voters likely are aware that — for practical reasons, if nothing else — it is not to their advantage to begin cutting off immigrants from their property. (It's important to note virtually no one claims this widespread denial of voting prerogatives in Luxembourg constitute any sort of humanitarian crisis.)
Nevertheless, the response to Luxembourg's practice of relatively open immigration — coupled with restricted citizenship — has some observers claiming the policy is tantamount to a violation of rights. Hence we hear charges of "taxation without representation" or the use of the often-loaded terms "disenfranchisement" and "democratic deficit."
Should Citizenship Be Based on Location or Origin? The idea that residents of a place ought to be quickly afforded full citizenship based on their current physical location, however, is far from universal.
Historically, policymakers, kings, and bureaucrats have long debated the criteria to be met in determining how quickly or how easily new residents ought to be offered naturalization.
For example, citizenship has been historically based on various criteria including residency, ancestry, promises of military service, and sworn oaths between individuals.
These criteria often fall into one of two legal traditions of naturalization: jus soli and jus sanguinis. Jus soli ("the right of soil") is the principle that naturalization ought to be based on where one is located, and this often includes "birthright citizenship." Conversely, jus sanguinis ("the right of blood") is the principle that naturalization is based on one's marriage, parentage, or origins.
Graziella Bertocchi and Chiara Strozzi have summarized the development of these two traditions in Europe and the AmericasSee working paper: "The Evolution of Citizenship:Economic and Institutional Determinants" by Graziella Bertocchi and Chiara Strozzi. December 2005. (http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.540.4022&rep=rep1&type=pdf):
In 18th century Europe jus soli was the dominant criterion, following feudal traditions which linked human beings to the lord who held the land where they were born. The French Revolution broke with this heritage and with the 1804 civil code reintroduced the ancient Roman custom of jus sanguinis. Continental modern citizenship law was subsequently built on these premises. During the 19th century the jus sanguinis principle was adopted throughout Europe and then transplanted to its colonies. ... On the other hand, the British preserved their jus soli tradition and spread it through their own colonies, starting with the United States where it was later encoded in the Constitution.
The rise of jus sanguinis in Europe, perhaps not surprisingly, coincided with the spread of ethnicity- and language-based nation states in the nineteenth century. This in turn led to greater concern over whether or not migrants could integrate into each nation's linguistic or cultural majority.
Thus, jus sanguinis requirements became an attractive means of slowing down the process of integrating new citizens and of ensuring that new migrant groups would integrate through native parentage, marriage, or through long terms of residency.
Europe vs. The Americas The situation was very different in the Americas, however. It's not a coincidence that we find the Americas to be far more reliant on the concept of jus soli.
Bertocchi and Strozzi note:
At independence, most of the incipient states [in Latin America] chose jus soli as a way to break with the colonial political order and to prevent the metropoles from making legitimate claims on citizens born in the new countries.
This is true enough. But it's also true that far lower levels of population density, coupled with perennial labor shortages, made jus soli both more practical and more attractive to states in the Americas.
As Edward Barbier illustrates in his book Scarcity and Froniers, the Americas have long been characterized by a strong need for more laborers to take advantage of the vast natural resources present across the regions often sparsely populated lands. This led to a variety of immigration policies in the Americas designed to increase immigration. Argentina and Brazil, for example, paid migrants from Italy to settle in South America. Via the Homestead Acts in the nineteenth century, the US government offered free land to new migrants. And across the Americas, of course, many laborers were imported by force via the institution of African slavery.
The most-preferred strategy, however, was often to simply offer easy citizenship to new migrants, and to guarantee citizenship for the children of migrants via jus soli provisions.
At the same time, migration across borders has often been a challenge in many areas of the Americas. Many South American states are separated by deserts, mountains, and dense jungle areas. During the nineteenth century, crossing the Andes mountains was not a simple affair. Similarly, the borderlands between the US and Mexico were largely unpopulated prior to the twentieth century. Mexico's population was concentrated in the southern regions of the country, and migration north required significant effort. It wasn't enough to simply reach the border, either. Access to jobs and capital usually required an even longer journey north or west in the American interior.
Thus, by 1929, legal scholar James Brown Scott could write: "there is no American country which accepts that principle [i.e., jus sanguinis] as the sole test of nationality." Since then, as the relative ease of migration has increased in the Americas, some regimes in the Americas — including the United States — have been pressured to pare back the dominance of jus soli provisions, although little have been done in terms of substantive change.
On the other hand, post-World-War-II Europe began to move away from jus sanguinis provisions. While Scott could conclude that just sanguinis was largely absent in the Americas, he also found "There are at present seventeen countries in Europe in which jus sanguinis is the sole test of nationality."
Part of this was due to the higher population density and geographic compactness of Europe. Moving between political jurisdictions has long been relatively easy in Europe, compared to the Americas. Since the mid-twentieth century, however, the trend has moved toward greater use of jus soli. As of 2010, according to a study by Iseult Honahan,
Ius soli citizenship is widely but by no means universally available in Europe. 19 European countries from 33 studied awarded ius soli citizenship at birth or thereafter. 10 of these countries grant ius soli citizenship at birth, and 16 after birth. ... [I]us soli in its pure (or unconditional) form is not found in Europe since its abolition in Ireland in 2004.
There are, of course, a number of conditional jus soli provisions that exist. These can include automatic birthright citizenship for foundlings and stateless children. But many states have at least some weak jus sanguinis provisions requiring birth to at least one native citizen. Naturalization can occur outside of these conditions, but these provisions often require years of permanent residency, citizenship classes, and other mandates.The extent to which jus soli provisions are adopted is not necessarily synonymous with ease of naturalization. For example, the United States could abolish birthright citizenship while also expanding naturalization through other means. On the whole, however, the degree to which jus sanguinis requirements are employed generally reflects a regime's overall openness to expanding citizenship quickly and easily. Notable exceptions exist, such as Sweden, which is restrictive in terms of just soli, but has permissive naturalization-by-application policies.
Honahan concludes that the trend in Europe "is towards the wider availability of jus soli citizenship" but with many conditions attached in most cases. Europe-wide, jus soli provisions occur across a spectrum, with more strict provisions present in Eastern Europe and Switzerland:
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Returning to our Luxembourg example, we can note that Luxembourg employs a "double jus soli" standard in which children born in Luxembourg receive automatic citizenship only if one of the parents was also born in Luxembourg. Honahan thus classifies Luxembourg as a jus soli country, but as we have seen, the situation in practice is one in which citizenship remains significantly restricted.
It is important to keep in mind, moreover, that the relative restrictiveness of naturalization law does not necessary reflect the restrictiveness of immigration law.
After all, Luxembourgers are frequently outnumbered by migrants, even if citizenship is restricted. Similarly, Switzerland has one of the largest populations of foreign-born residents in the world, yet is highly restrictive in terms of naturalization. Norway is similarly restrictive, although its foreign-born population is equal to that of the United Kingdom, which employs a more liberal jus soli standard.
This mismatch between immigration policy and naturalization policy highlights for us the fact that immigration has never been merely a matter of economic relationships. For example, among laissez-faire liberals, both Ludwig von Mises and Murray Rothbard recognized that there is no economic argument against immigration. The situation is different, however, when we consider matters of citizenship and political participation. In these cases, migrants expand their role beyond the private sector and into the political sphere. As Mises noted, this fact — that fact that immigrants are not merely consumers or workers — carries with it a variety of complicating factors around the question of who shall be in control of the state. The smaller the state, the less relevant this question is. But in the presence of a robust state apparatus — especially one that controls educational institutions and social-welfare programs — this question becomes far more important.
Apparently, Luxembourgers are quite aware of these facts and have decided to maintain and expansive immigration apparatus while limiting citizenship. On the other hand, thanks to geography and the legal traditions of the New World, many Americans have a skewed view of the alleged inseparability between immigration and citizenship. This has clouded the American debate over birthright citizenship.
While one often hears a lot of talk about the virtues of "mom and pop" shops (and the evils of "big box" stores) policy makers do remarkably little to encourage the growth and health of small businesses. While the federal government has created a federal boondoggle ostensibly designed to favor small business — known as the Small Business Administration — only a tiny number of businesses ever benefit from anything the agency does.
Policies Stacked Against Small Businesses In actual practice, policymakers fawn over large firms, creating special programs for tax breaks and subsidies, as made obvious every time a large firm looks for a new place to put a corporate headquarters. The stated political justification is often that "this business will produce a large number of jobs!" This rationale, however, ignores the fact that if a thousand of the city's small businesses were given a similar tax break, they would likely produce a comparable number of new jobs. This is conveniently ignored, and policymakers instead choose to favor certain large firms, which in turn makes it harder for small firms to compete.
At the same time, governments at all levels relentlessly hand down ever more regulations and mandates to businesses of all sizes. Yet it is small firms who suffer the most because they have less access to financing, equity, and resources needed to cope with mounting regulatory requirements. Licensing and labor regulations create more pitfalls for small business owners to fall into, while locking many potential business owners out of industries entirely, unless they comply with arbitrary "training" or certification mandates. These mandates can be quite draconian, such as Iowa's requirement that barbers receive 2,100 hours of training — more training than is required of a paramedic — in order to cut hair.
Other regulations indirectly disadvantage small businesses as well. As finance researcher Karen Petrou noted in the wake of the Great Recession, banking regulations in recent years have made it harder on small businesses:
[C]apital requirements imposed after the banking crisis make it a lot more expensive for banks to do a startup small-business loan than go into wealth management. Startup loans are riskier than wealth management, of course, but the capital costs have become prohibitive, and banks don’t lose money on purpose.
Small Businesses Increase Competition for Workers It's at this point that a seasoned reader might expect me to go into a variety of explanations about how the small business economy is important to GDP growth, and to employment growth, and to vague notions of "innovation."
But that's not where I want to go with this.
Yes, the small business economy is good for employment and economic development. But small businesses also serve very important social functions, while offering benefits to many workers as well.
The small business economy offers more options for workers who are competing for wage work, while also offering a potential exit from wage work altogether — and entry into sole proprietorship.
In Human Action, Ludwig von Mises notes that one of the greatest limitations on a worker's bargaining power with employers is the ability of a firm to exercise monopoly power over hiring. The thing is, this is impossible in a relatively free market. So long as new firms can enter the marketplace, hiring firms will come under pressure from competitors, and thus bid up workers' wages. As Mises notes, firms must compete with each other for all types of resources, whether building materials, square footage, or financial services. It is no different with workers. Consequently, one of the worst things that can happen to a worker is for governments to create what Mises calls "an institutional restriction of access to entrepreneurship." If governments act to limit the ease with which new businesses can enter the marketplace and compete with existing firms, this lessens the power of workers. The more firms a worker has to chose from, the better off the worker is. This is, of course, facilitated by a diverse and healthy small business economy.
More Potential Opportunities for All Types of Workers Benefits for workers also extend to "eccentric" or "niche" workers who might find themselves otherwise relatively unemployable.
After all, large firms often become large firms because they excel at catering to the needs of the most common preferences in the marketplace. Workers who are accustomed to dealing with these mainstream preferences — whether they be along linguistic, cultural, or socio-economic lines — will be a good fit at the large firms. On the other hand, a worker who has poor English-language skills, but who is well versed in in dealing with customers of a certain ethnicity, may find employment far more easy to come by among certain small business owners who cater to a niche, ethnic-enclave, or socio-economic group.
In other words, the existence of numerous small businesses don't just provide more employment opportunities in the abstract. They often provide more opportunities to workers who have the most trouble in finding employment otherwise.
This is part of the reason why small business ownership has so long been an important part of economic development for ethnic minority groups and for immigrants. Today in the United States, around 25% of U.S. firms are founded by immigrants, and this share rises to above 40% in states like California and NewYork.
And immigrant small business owners are often just part of a growing economy of minority-owned businesses, whether founded by native-born or immigrant owners. According to CNBC:
Business ownership among minorities has been on the rise in recent years. Between 2002 and 2007, minority-owned businesses increased 46 percent, while nonminority-owned businesses grew 10 percent during that same period...
In 2007, Asians owned 1.6 million businesses, African-Americans owned 1.9 million, [and] Hispanics owned 2.3 million.
It's not a coincidence that many people outside the cultural mainstream are founding their own businesses. Often, these businesses are founded precisely because they provide relatively better job security and flexibility to owners and workers who could not find similarly attractive terms at larger mainstream firms.
Benefits Beyond Money Profits Economists often debate whether or not the small-business economy is "efficient." Some have even suggested that small businesses should be regarded as harmful because they use resources that larger firms might be able to more "efficiently" use due to advantages of economy of scale.
This is, of course, a terrible way of looking at small businesses
In addition to the benefits offered workers, small businesses often provide a wide variety of benefits to both owners and consumers in the form of services to the community, and the psychic profits afforded to owners.These services cover a wide variety of industries. Many often assume that minority-owned businesses as nearly all retail outlets, but historically, retail has only constituted one-quarter of these businesses. The rest have included everything from construction to financial services such as insurance. (https://www.nap.edu/read/9719/chapter/10) Bookkeeping and auto repair are also among the most common types of small businesses. Unfortunately for small businesses, many of these benefits don't show up as money profits, and thus economists ignore them.
For example, it is clear that that demonstrated preference of a small business owner is to run a small business even if, in theory, he or she might be able to command a higher wage some other way. It's not difficult to imagine why this might be. Many small business owners — even if the enterprise does not provide for an especially high income — prefer self-employment to collecting a wage because it offers the sort of flexibility, control, and peace of mind that is not often available to wage earners. While self-employment can often mean long hours, it also often means the proprietor is unlikely to lose all of his income at once, due to being laid off. Even if the business becomes less profitable, the proprietor is not going to walk to his desk one day to find a pink slip. Moreover, if the economy is weak, a business owner can temporarily cut his own wages with more flexibility and ease than he can normally cut the wages of an employee. If times are good, a business owner can temporarily increase his own hours (and income) to take advantage of the sudden increase in demand. For a great many business owners, this sense of control over one's schedule and career are worth it, even if the full benefits do not show up in any government statistic.
Negative Attitudes Toward Small Business Endure In spite of all of this, we can expect both policymakers and pundits to largely ignore small businesses and to continue to ignore the high costs imposed on small firms and small entrepreneurs by government regulations.
Some even continue to attack small business owners because they are allegedly not regulated enough.
Last year, for example, the left-wing Jacobin magazine declared that "small businesses are overrated" and that "[w]e shouldn’t fetishize mom and pops. They offer lower wages, skimpier benefits, and inferior labor protections."
This "analysis" by author Matt Bruenig attempted to make the case that since some government regulations don't apply to businesses with fewer than 15 employees, this creates a "loophole" through which workers can be oppressed with impunity by small business owners. The ideal economy for Bruenig, it seems, is one in which even the smallest firm must do all the same paperwork and pay the same government mandated benefits as huge corporations.
In real life, of course, this would ensure that few new small firms are ever created at all.
Fortunately, even the center-left Institute for Local Self-Reliance sees the danger in attacking small businesses. As noted by the ILSR's Stacy Mitchell, small businesses disperse economic resources more evenly throughout a community, and, as Mises noted, they provide more options to employees while creating more competition for large firms. Nor do small firms really pay less, unless we're talking about highly-paid managerial jobs. Although Bruenig thinks small business should be trashed because they allegedly pay lower wages than large firms, Mitchell writes:
For low- and middle-income workers, there is no wage gap between small and large firms. People in the bottom 50 percent of the income distribution earn about the same working at large firms as they do at small. In other words, the fact that big companies pay more on average is solely a function of the earnings of their highest paid employees.
In fact, this myth that larger firms offer a cornucopia of higher wages for everyone has become widespread across the ideological spectrum. A belief in this trope is partly why Kevin Williamson at National Review last month insisted that big business is getting the short end of the stick thanks to a romanticizing of small business. But in the age of "too big to fail," the idea that big firms are America's punching bag is not terribly convincing. Meanwhile, recent efforts by conservatives and leftists to denounce small businesses as overrated is not an encouraging trend.
One of the first lessons I give my economics students in the principles courses I teach or in my MBA classes is the famous Diamond-Water Paradox, or what economists historically have called the Paradox of Value. Why are diamonds more expensive than water? Why are professional athletes paid better than teachers or soldiers?
When I present these paradoxes in the form of test or homework questions, my students often miss them, not understanding the difference between measuring at the margin and total measurement of something. For example, I sometimes present a quote which I saw posted in a teachers’ lounge at a middle school almost 40 years ago in which the writer in a National Education Association newsletter claimed that Americans “don’t value education,” the “proof” being that professional athletes are paid more than teachers despite the difference in their apparent “usefulness” to society.
Every once in a while, a student will reply correctly that this is an example of the Diamond-Water Paradox in which the pay differentials are the result of there being only a small number of people who qualify as professional athletes versus the much larger number of teachers. Dealing with this subject nearly 20 years ago, I wrote :
People who can qualify to be teachers are relatively more abundant than athletes who can withstand the rigors of professional sports. Furthermore, the professional athlete operates in an arena in which he (or she, as women’s professional sports are increasing) can entertain large numbers of people at one time. For example, it is estimated that more than a billion people worldwide see the Super Bowl. The best lecturers may speak before a few hundred listeners, and most teachers teach 25 students or so at a time.
Each year more than 40,000 people receive Ph.Ds. in the United States, while perhaps 40 rookies may make it into the NBA. For the few who do make it into the pros, their expected tenure is short, maybe a few years on average. A teacher, on the other hand, may be able to practice his profession for up to 40 years. Nor do most professional athletes strike it rich. The vast majority work in the obscurity of minor league sports or other relatively low-paid positions, such as a golf professional at a country club. In other words, the multimillionaire athlete is the great exception, not the rule.
I can understand why teachers and politicians misunderstand the Paradox of Value. The former, for the most part, never have been presented with such lessons, especially since the concept is a bit technical, while the latter (politicians) do not like anything to be in the way of their demagoguery, especially when they are putting something over on the public. (As for socialists like Bernie Sanders or Alexandra Occasio-Cortez, I doubt seriously that they even are intellectually and morally capable of learning about such paradoxes, especially since such knowledge undercuts their own political narratives.)
It is quite another thing when economists and especially Nobel-winning economists such as Paul Krugman fail to understand economic fundaments, and especially the D-W Paradox. Marginal utility is at the very heart of economic analysis and one cannot understand economic concepts of value without knowing that marginal utility means.
In a recent column and blog post , Krugman lamented the fact that income for transfer truck drivers has fallen in the past 40 years, and he used that as “proof” that overall payment for labor services is lower than it was in the 1970s. He claims that the decline of organized labor in the USA is the main reason for this “injustice,” in which (according to Krugman) almost all of the productivity gains in the economy have accrued to a tiny number of people, thus, appealing to the urban legend, “The rich get richer, and the poor get poorer.) He writes:
The decline of unions , which covered a quarter of private-sector workers in 1973 but only 6 percent now, may not be as obviously political. But other countries haven’t seen the same kind of decline. Canada is as unionized now as the U.S. was in 1973; in the Nordic nations unions cover two-thirds of the work force. What made America exceptional was a political environment deeply hostile to labor organizing and friendly toward union-busting employers.
And the decline of unions has made a huge difference. Consider the case of trucking, which used to be a good job but now pays a third less than it did in the 1970s, with terrible working conditions. What made the difference? De-unionization was a big part of the story.
There is much here not to agree with the various laws of economics, but this analysis will be limited to Krugman’s last paragraph about truck driving, as his statement about compensation for truck drivers demonstrates a stunning lack of understanding of what economists call marginal utility and the discounted marginal revenue product, or DMRP. (Murray Rothbard refers to it as discounted marginal value product, or DMVP.) As I will point out, Krugman’s errors are not trivial; they are fundamental to the understanding of economic theory itself.
In explaining the concept of DMVP, Rothbard writes: “…the marginal value product of a factor service unit is equal to its marginal physical product times the price of that product.” Rothbard further points out that as the number of available factors increases, its DMVP, naturally, will fall, owing to the Law of Diminishing Returns to factors of production and the decline in marginal revenue as supply of the final good increases.
What does this have to do with Krugman’s assessment of the decline in pay of American truck drivers? First, we have to remember that Krugman is engaging in an “apples and oranges” comparing of trucking 40 years ago and trucking today. The trucking industry is 1979 was much smaller than it is today due to the fact that the Interstate Commerce Commission tightly controlled the industry by severely limiting routes trucks could use and suppressing competition between trucking firms.
Business Insider notes that before the early 1980s, the trucking industry was much smaller than it is now, as the government restricted industry growth:
In 1935, the Interstate Commerce Commission (ICC) became the oversight board for the trucking industry. A law also passed that limited the number of new entrants to the trucking industry.
Trucking companies that were already in existence could continue operation, but new carriers "found it extremely difficult to get certificates," wrote Thomas Gale Moore, then a senior fellow at Stanford University's conservative public policy think tank Hoover Institution.
The legislation set forth other limitations, according to Moore. Companies had to file their rates with the ICC thirty days before they came into effect. Other companies or individual carriers were allowed to see those rates, and would often protest the rates if they found them low enough that they would undercut their own business. The ICC could then suspend those rates as it inspected them.
Truckers also had to buy routes, usually from firms that already had the authority to operate on those routes, and it often led to inefficiencies. Even if a trucker had the authority to transport, say, produce from Sacramento to Seattle, he or she might lack the authority to carry anything on the return trip.
To put it another way, the ICC regulated trucking in the same way it did passenger airlines and railroads and, not surprisingly, many of the gains fell to the industry’s unionized workforce. Writes Business Insider:
These route regulations were jacking up the price of goods. Certain goods exempt from regulation moved at rates 20% to 40% below similar products that were regulated. Moore noted that rates for "cooked poultry" were 50% higher than rates for "fresh dressed poultry."
However, the average truck driver during this era was well-paid. It was the sort of high-quality, blue-collar job that many lament doesn't exist today. In 1977, the mean earnings of a unionized truck driver stood at $96,552 in 2018 dollars. At least 80% of drivers were unionized at this time.
That arrangement ended in 1980 with the passage of the Motor Carrier Act, which ended ICC oversight, allowed much more competition in the industry, along with ending the ICC’s near-prohibition on new industry entrants. Not surprisingly, the unions and the trucking firms themselves opposed the law. (When running for president in 1980, Ronald Reagan gained the endorsement of the Teamsters Union by promising to delay carrying out deregulation for two years.)
As Business Insider demonstrates, the lifting of restrictions led to a doubling of trucking firms within a decade and hauling prices dropped dramatically, leading to lower consumer prices and much more availability of consumer goods. None of this is surprising. Business Insider estimates that overall trucking costs have fallen (in real terms) more than 40 percent since 1980:
Truckload shipment rates fell by about 25%, adjusted for inflation, from 1977 to 1982. Logistics (half of which are trucking costs) used to account for 16% of our country's annual expenditure. Even though we're shipping more goods than ever, it's now down to less than 8%.
Of course, the explosion of new trucking firms meant new demand for drivers, but with deregulation also came a lessening of the restrictions on people becoming drivers. When the industry was under tight government control, it operated as a legal cartel supervised by regulators “captured” by industry executives and organized labor. Owners and employees received monopoly rents that simply would not have existed in a competitive industry.
The addition of new factors of production into trucking also has had the effect of lowering the DMVP of drivers, which means truck-driving pay is less in real terms than it was when the number of drivers was artificially limited by self-serving regulation. To put it another way, while marginal compensation to drivers is less than pay in the past, total compensation to factors is greater. This is simple economics at work.
Although Krugman does not bring the DMVP, he clearly confuses total compensation with marginal compensation and is extrapolating the decline in truck driving pay to the entire workforce. Thus, he presents a picture in which real American wages have fallen in the last four decades, which implies that American workers have a lower standard of living than they did in the 1970s. There can be no other meaning to Krugman’s claims.
Mark J. Perry of the American Enterprise Institute, however, notes that contrary to what Krugman is saying, living standards for American workers are much higher than they were in the “golden days” of regulated government cartels. This should surprise no one, as when government regulations artificially restricting productivity are lifted, the economy becomes more productive, which means that consumers are the main beneficiaries. It would seem, then, that Krugman is arguing for a return to the era when entire industries were regulated cartels or, like AT&T before its breakup and telecommunications deregulation, had government-protected monopolies.
Krugman is partially correct on one point, and that is regarding the decline of labor unions in the United States. I say partially correct because the Teamsters Union was a powerful force in keeping the trucking industry much smaller and less productive than it is now, with union members capturing much of the monopoly rents created by the regulatory arrangements. However, if Krugman is claiming that the Teamsters could somehow have managed to keep the same pay levels for truck drivers and the industry also become more productive and cost-efficient, he is not telling the truth.
The employment numbers in trucking tell the story that refutes Krugman’s claim that the fall in real wages for truck drivers is due solely to the decline of union membership. According to the Bureau of Labor Statistics , there were about 1.3 million truck drivers employed in the trucking industry. By 2018, however, the American Trucking Association reported that the number of truck drivers had grown to 3.5 million.
Business firms in competitive markets look to provide better products and services while cutting costs. Trucking deregulation enabled exactly those things to happen in transportation, something that Krugman apparently does not understand. Instead, he presents the false picture in which prosperity comes only when the government forces up business costs and creates monopoly rents that are politically distributed. It is one thing for a politician to paint such a picture; it is quite another when a Nobel laureate does it.
Homelessness today is often blamed on both "gentrification" and "neoliberalism." When these terms are used in the context of urban housing, it is usually implied that too much market freedom makes housing unaffordable to large swaths of the population. Thus, we are told capitalism is the primary culprit we now find in many large cities from Boston to Los Angeles.
But there is much more to the story.
Since the Progressive Era, government agencies — from the federal level on down — have been front and center in subsidizing, regulating, and planning city development in ways that have made housing in city centers more sparse and more expensive for households who aren't part of the hipster-millionaire demographic that so many urban planners and politicians are working hard to attract.
While rising demand for housing in a fixed number of square miles will indeed increase the price of land and housing, various types of government intervention makes housing more expensive than it would otherwise be. And sometimes, through zoning ordinances and other regulations, cities largely outlaw just the sorts of housing that are most needed by low-income residents.
To gain a better understanding of why homelessness is a recurring problem with apparently growing numbers, it is helpful to examine the origins of what is now standard operating procedure for cities: centralized urban planning. While very-low-income households and persons have long been part of the urban landscape in both the United States and Europe, city officials in the past often recognized that low-income neighborhoods were simply something that had to be tolerated. Although reformers often complained of the unclean and allegedly immoral nature of these places, a lack of government power — and resistance from private owners — prevented city officials from abolishing the areas of cities that provided housing. This housing — however sub-optimal it may have been — was preferable to homelessness.
The Progressives and the Idea of Urban Planning Those low-income communities began to meet more organized opposition during the Progressive Era, although it's not difficult to see why the idea of urban planning as we now know it was first embraced by Progressives. By the late nineteenth century, the situation in many American cities filled many middle-class Progressives with dismay. Lower-income neighborhoods of cities often lacked proper sewage infrastructure. They were dirty. Homicide rates were probably higher than they are today in many urban areas.
Much of the problem was blamed on "congestion" or "overcrowding" which today we would sometimes just call "density."
According to Steven Conn in his book Americans Against the City,
For Progressives in every major city, crowding was the scourge that had to be eliminated. "It is the overcrowding that breeds crime and vice," exhorted one writer, who insisted that the residents of these areas were not inherently bad, but were made so by their surroundings.
In many places, however, the awfulness of these places were exaggerated by reformists. After all, many of these "slums" contained multi-generational families, and longtime residents who made real efforts to maintain some level of safety and stability in the community. Many of the slums were really neighborhoods of boarding houses. They were crowded and uncomfortable. But they weren't shantytowns either.
Common Progressive "solutions" to the asserted problems of the slums can be found in a 1911 report from a New York City commission on congestion. The recommendations includeConn, page 29.:
Regulating the height of tenement buildings.Limiting lot occupancy.Providing space for parks, playgrounds, and recreational center.Regulating maximum occupancy for residential units [as part of an effort to abolish boardinghouses].Locating factories in a more deliberate and rational way. Most of these recommendations assumed a much larger role for the state in regulating, inspecting, and mandating changes to the current use of space. With this new sort of city planning, governments would need far more housing inspectors, zoning commissions, and a legal apparatus necessary to compel compliance.
Other cities followed suit, and "between 1907 and 1916 half of the nation's fifty largest cities did commission or publish comprehensive city plans to deal with overcrowding."Ibid. page 29.
Conn concludes: "Thus did city planning arrive in the Progressive City." And with it came zoning and a host of other mandates which gradually eliminated existing low-income housing units, while preventing the construction of new units to replace them.
Inherent in the new ideals, not surprisingly, was the idea that private sector actors ought not be allowed to decide on their own what was built in the city, and where. In the Progressive mind, too much private sector freedom had produced the "congestion" which Progressives sought to abandon and reform. This market activity was to be replaced by the decisions of city planners.
The Rise of Post-War Urban Renewal Progressive reformers, however, were limited in pursuing these goals by a lack of funding and by political opposition from both property owners and the residents of housing which was targeted for reform. After all, if housing was to be regulated with new occupancy rules and mandatory changes in density, this would lead to both rising prices and forced removals from existing housing.
Property owners likewise, opposed reforms because low-rent units are often only worth the trouble when a large number of paying customers are concentrated in a relatively small space.
To be sure, private owners were open to having their property purchased by government. And many cities were eager to tear down "blighted" neighborhoods. But government funding was often scarce. As noted by Colin Gordon, local governments
could not overcome the pervasive obstacles to redevelopment: private interests had no incentive to facilitate public policy, and public interests had no money to acquire or assemble private property.Gordon, Colin, "Blighting the Way: Urban Renewal, EconomicDevelopment, and the Elusive Definition of Blight." Fordham Urban Law Journal, Volume 31, No. 2, 2004.
Things changed, however, with the advent of the New Deal and the end of the Second World War.
What had a been a largely local move to reduce density and forcibly "clean up" lower-income neighborhoods in the Progressive Era became a national movement under the New Deal. The National Housing Act of 1937, for example, established a system of loans and grants-in-aid to local public housing authorities. Unfortunately, the thrust of these efforts was redevelopment and not the production of new units. In fact, use of the federal funds for redeveloping housing units "required the clearance of an equal number of 'blighted' properties."
Government subsidized redevelopment accelerated under the 1949 Federal Housing Act which
made federal funds available for the redevelopment of large areas rather than merely the removal of discrete slum conditions. Under the new law, local redevelopment corporations could buy and clear blighted areas with federal money, sell the land to private developers, and use the proceeds to cover the redevelopment costs.Ibid.
There was opposition from "private interests threatened or displaced by urban redevelopment plans," but
state and federal courts persistently held that the broad public purpose of redevelopment over-rode the claims of individual property owners, and that resale of cleared properties to private developers amounted to an appropriate public use.Ibid.
Over time, the new spirit of urban renewal, propelled forward by federal legislation and federal money, resulted in a war on "blighted neighborhoods," with the term "blight" proving to be quite flexible. Indeed, any neighborhood or city block that city planners regarded as producing too little tax revenue, or was simply unattractive, was targeting for a government funded-buyout, leveling, and redevelopment.
Through it all, government officials claimed they were increasing housing supply for American families. As noted by Walter Thompson:
Razing slums was key to reviving city centers, held the prevailing wisdom for many decades last century. In his 1949 State of the Union, President Harry Truman hailed "slum clearance" as a weapon to combat the nation's post-World War II housing shortage. As a 1945 San Francisco Chronicle op-ed stated, "bluntly, nothing can be done to improve housing conditions here until a lot of people clear out."
But urban renewal only improved conditions for some people. In his article "No Room at the Inn: Housing Policy and the Homeless," Todd Swanstrom notes "It is well documented that the urban renewal programs of the 1950s and 1960s tore down more housing than they replaced."Todd Swanstrom, "No Room at the Inn: Housing Policy and the Homeless," 35 Wash. U. J. Urb. & Contemp. L. 081 (1989) Available at: http://openscholarship.wustl.edu/law_urbanlaw/vol35/iss1/
This is because, as Gordon describes it, federal policy was "committed to improving the housing stock without increasing it."Murray Rothbard also noted how governments were demolishing housing units without replacing them. See this video: https://www.youtube.com/watch?time_continue=43&v=ICiqFf1kJ7g. A selection from the documentary "The Incredible Bread Machine: https://www.youtube.com/watch?v=ycGRERrGsMo
Yes, the bulldozed units in the slums were replaced with some units of higher quality. But they were rarely replaced with enough units to replace those that had been torn down.A common redevelopment outcome was one in which some of the displaced households could afford to rent in the new neighborhood. But there was usually a portion of the old tenants who were forced out. Walter Thompson quotes some officials of the time period: "It is true that a number of people there could afford to pay the rents that will be required," said City Planning Director T. J Kent, Jr. at the time. "But the rents will be too high for a large group of residents." ... He added that there was "no pat answer" for accommodating people who were to be displaced. (see: https://hoodline.com/2016/01/how-urban-renewal-destroyed-the-fillmore-in-order-to-save-it)
City planners were happy to show off the shiny new projects they had used government money to redevelop. But unseen were the households who simply could not afford units in the new buildings.
After all, the poor that lived in the slums lived there precisely because it was cheap, low-rent housing. Reformers admitted there were no "pat answers" to explain what would become of the displaced families. But few reformers seemed much troubled by it. Then, as now, it may have been what really mattered to reformers was to be able to claim they were doing something. And besides, living in the slums was obviously a bad thing. But as Swanstrom very pragmatically suggests: "these accommodations [in the slums] may have been offensive by middle class standards, [but] they were nevertheless better than living on the streets."
But many reformers ignored this bit of wisdom and insisted on housing policy built around urban central planning, anti-slum mandates, and redevelopment which favored urban commercial development where residential development once had been.
Meanwhile, federal policies were introduced during the New Deal and in later iterations of expansionist federal social policy which encouraged more spending in the suburbs than in the cities. Federal programs designed to increase suburban single-family homes proliferated with new federal creations like Fannie Mae and new mortgage insurance programs. Federal grants also encouraged construction of new freeways out of the city, and building more suburban infrastructure. The dollars spent on subsidizing the suburbs thus greatly outnumbered those spent on subsidizing construction of new housing in city centers. Combined with anti-slum policies, federal policy and federal spending patterns acted to drain central cities — and their neighborhoods — of capital while demolishing the housing that remained.
Implications for Today By the 1980s, as homelessness became a frequent topic of research, some scholars began to recognize how federal urban renewal policy had laid the groundwork for the rise in homelessness that occurred in that decade. It turned out that the federal government's grand plan of leveling flophouses and residential hotels in the name of "beautifying" cities, mostly just resulted in destroying the only housing the very-low-income population could afford. Deprived of their units in the slums, these people ended up living in tent cities and cardboard boxes instead.
Today, little has changed for those with the lowest incomes. The options once available to them in the pre-1950s world are gone, and were never replaced.
Thanks to the persistence of the Progressive mindset in cities, zoning, "redevelopment" and a centralized control of new construction remains the norm. "Density" is the new "congestion" and the attitude of city planners remains the same. They bemoan the lack of affordable housing while also blocking efforts to build more housing. Meanwhile, they tighten controls on modern-day boarding houses and other private-sector attempts to provide low-cost housing. Planners impose height restrictions and density controls. They create arbitrary minimum sizes for units. In many states and cities, the definition of "blight" remains flexible, empowering governments to further eliminate old housing units at the discretion of city planners.
Moreover, the old urban renewal methods persist in updated forms. Tax Increment Financing (TIF) legislation is geared not toward low-cost housing, but toward new commercial development. Often, that development is built where "unsightly" (but affordable) housing once existed. Its destruction is encouraged by government policy. Federal tax policy and mortgage policy continues to draw capital away from urban rental housing and into suburban single-family housing.
Yet, city centers remain the most practical place for very-low-income housing to be built and sustained. This is because the lowest-income households need to be close to the densest areas that sustain mass transit and access to employment. By destroying the urban ecosystem of very-low-income housing, though, governments have left many of these people few options other than living in cars, alleyways, and sidewalks. This, of course, is far more dangerous than living in a run-down residential hotel with a functioning toilet down the hall, and a locking door on the room.
But even if city governments were to begin allowing the private sector to freely build again, it would likely take decades to produce the housing infrastructure necessary to address the housing needs in city centers. We continue to live with the wreckage of failed urban renewal, and the evidence can be seen in the tent cities and makeshift latrines we now see in public spaces.
Since Irving Fisher and John Maynard Keynes were writing in the 1930s, there have been two prevailing orthodoxies in mainstream economics:
- That deflation is an unalloyed negative.Irving Fisher, "The Debt-Deflation Theory of Great Depression," Econometrica 1, no. 4 (October 1933): 337–57.2. That consumer-led economic growth must be our top economic priority.John Maynard Keynes, The General Theory of Employment, Interest, and Money (London: Macmillan, 1936).
In this article, using British macroeconomic data from the nineteenth, twentieth, and twenty-first centuries as well as praxeological reasoning, I will seek to challenge this received wisdom by showing that growth has come at the expense of net national savings, which is not sustainable in the long run.
First, on deflation, if we study the following table (figure 1) showing average wheat and bread prices versus average labor wages and total population for the 1800s,B.R. Mitchell, British Historical Statistics (1988; Cambridge: Cambridge University Press, 2011), pp. 756–57, 769–70, 165, 452–53, 9. Note that the prices for bread are average for London. we can see immediately that average prices fell as wages and population rose. The basic claim that deflation is always a bad thing thus fails to explain the entirety of the nineteenth century, especially after 1846 when laissez-faire hero Richard Cobden finally persuaded Sir Robert Peel to repeal the Corn Laws after a decade of political activism and agitation.
FIGURE 1
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This set of figures not only dispels myths about deflation emanating from the 1930s, but also the myths of the protectionists of the early 1800s, who had opposed Say’s Law and argued in favor of maintaining the Corn Laws.See William D. Grampp, The Manchester School of Economics (Oxford: Oxford University Press, 1960); Thomas Sowell, Say’s Law: An Historical Analysis (Princeton, NJ: Princeton University Press, 1972), pp. 115û41; and W.H. Hutt, A Rehabilitation of Say’s Law (Athens: Ohio University Press, 1974), pp. 24–25. Thomas Malthus — Keynes’s avowed economic hero — argued that wages are inextricably tied to the price of wheat. David Ricardo followed him basing his argument on a convoluted set of assumptions including his differential Theory of Rent and the homogeneity of wage rates.David Ricardo, "On the Principles of Political Economy and Taxation" (1817), in The Works and Correspondence of David Ricardo, ed. Piero Sraffa, 11 vols. (1951; Indianapolis, IN: Liberty Fund, 2004), vol. 1, especially pp. 95–109. The "wheat" theory of wages is demonstrably untrue, which can be shown empirically and using the praxeological method.
William D. Grampp showed it empirically simply by dividing annual average wages by average wheat prices to produce "wheat wages" from 1815 to 1846.Grampp, The Manchester School of Economics, p. 32. If Malthus and Ricardo were correct "wheat wages" would be fairly constant for fifteen-or-twenty-year periods, but this is not observed because they fluctuate wildly. In some years, wheat is as much as 36.1 percent higher than wages (1817), and in other years as much as 44.2% lower (1835). Still, this argument cannot be won by empiricism. As Grampp himself notes, supporters of Ricardo such as Mark Blaug have simply questioned the validity of the data. However, the eagle-eyed Ricardian could simply pick a twenty-year range — let us say 1816 to 1836 — and average the "wheat wages" together to find only a +0.6 percent difference between wages and wheat, and only a -0.5 percent difference for the entire period. While this does not show year-to-year consistency, they might reason it demonstrates that prices nonetheless on average oscillate around their "natural rate." Games of statistics like this can always be played, so we need to expose the error in the underlying reasoning.
Ricardo’s contemporary, Nassau William Senior put his finger on the problem: "Corn does not become dear because a portion is raised at a great expense, but a portion is raised at a great expense because corn has already become dear."Nassau William Senior, "Report — On the State of Agriculture," Quarterly Review 25, no. 2 (July 1821): 476. Here Senior seems to anticipate Carl Menger in recognizing that the value of a good is determined by the preferences of the consumers and that capital investment in production of that good is a recognition of this fact. The costs of the factors of production are determined with the final price of the consumer good (and possible projected earnings) already in mind.Carl Menger, The Principles of Economics, trans. James Dingwell and Bert F. Hoselitz (1871; Auburn, AL: Mises Institute, 2007), pp. 149–74. In fact, as Ludwig von Mises went on to argue, economic calculation is only made possible by this price structure.Ludwig von Mises, Socialism: An Economic and Sociological Analysis (1922; Mansfield Centre, CT: Martino Publishing, 2012), pp. 114–22. Individual entrepreneur-capitalists appraise the prevailing market conditions and decide to allocate their resources to farming wheat or to establishing a coal mine, or to opening a factory manufacturing textiles, or perhaps an ironworks. They anticipate future market demand for this or that good and then invest in capital and labor accordingly, costing it against projected future returns. If they are correct, they will make some profit, if they are incorrect, they will make losses and eventually be forced to close the venture. This obvious reality of nineteenth-century life (indeed, of life at any time where markets are allowed to operate) is completely ignored by Ricardo, who "totally leaves out the entrepreneur."Murray N. Rothbard, An Austrian Perspective on the History of Economic Thought, 2 vols (1995; Auburn, AL: Mises Institute, 2006), vol 2: Classical Economics, p. 86. One entrepreneur in this period, John Bennet Lawes, developed a new fertilizer product which led to a 37 percent increase in per acre wheat yields in the 1840s which not only made him rich but also translated into a near 29 percent increase in average returns for tenant farmers.Mitchell, British Historical Statistics, pp. 756–57, 195 This blindness to innovation in Ricardo’s thinking ensured that, despite his reading of Jean-Baptiste Say, he could see how the different parts of an economy might affect each other.
One example of this blind spot in Ricardian thinking is that rent is not determined by the quality of land alone but by the many factors which affect demand for it, including its location and connectivity: "Railways affected rent by opening up distant markets to farmers and by cheapening the cost of farm inputs such as seeds, fertilisers, machinery and coal as transport costs fell."Stephen John Pam, Essex Agriculture: Landowners’ and Farmers’ Responses to Economic Change, 1850–1914, PhD diss (London: London School of Economics, 2004), p. 43. The role of fixed capital investment also goes missing as a factor in Ricardo’s theory. As George Stigler noted, "Ricardo assumes … that all capital in agriculture is circulating capital."George Stigler, Production and Distribution Theories: The Formative Period (New York: Macmillan, 1941), p. 285. For example, one technological innovation in the 1870s was the "tackle," a steam-powered tractor and plough which greatly increased productivity. As with all automation, such contraptions reduced the need for labor while increasing output. They cost around £645, which for most tenant farmers (and their landlords) would have required some savings and investments — those early adopters would enjoy some competitive advantage over those who did not or could not invest. Ricardo’s static analysis could not foresee the effects of these sorts of changes which ultimately broke the Malthusian trap. In 2019, agriculture is around 0.59 percent of the UK economy and 1.6 percent of its workforce, while providing 50 percent of the food supply."Food Statistics in Your Pocket 2017 — Global and UK Supply," Department for Environment, Food and Rural Affairs (9 October 2018), available at: https://www.gov.uk/government/publications/food-statistics-pocketbook-2017/food-statistics-in-your-pocket-2017-global-and-uk-supply. Neither Malthus nor Ricardo foresaw technological advancement on this level. The Malthusian Trap was thus broken.
However, we have not yet freed ourselves from the Keynesian Trap of Malthus’s spiritual successor. In the table below (figure 2),Data adapted from Bank of England, "A Millennium of Economic Data" (2016), available at: https://www.bankofengland.co.uk/-/media/boe/files/statistics/research-datasets/a-millennium-of-macroeconomic-data-for-the-uk.xlsx. I have compiled various decade-average statistics for the UK economy from the 1840s to the present day. GDP figures are given in 2015 £billions. Population is given in millions of people. I have derived the Gross Domestic Private Product (GDPPSee Robert Higgs, "Government Bloat is Not Growth: Real Gross Domestic Private Product, 2000–2011," Mises Wire (December 20, 2012), available at: https://mises.org/library/government-bloat-not-growth-real-gross-domestic-private-product-2000%E2%80%932011.) by subtracting Government Consumption from GDP. GDPP is used here to distinguish genuine growth from government bloat.
FIGURE 2
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GDP = Decade average in 2015 £billions; Population = decade average in millions of people; GDPP = Gross Domestic Private Product = GDP minus Government Consumption Looking at this, several things should become starkly apparent. In the 1800s, despite sustained population growth and genuine economic growth as measured by GDPP, combined public and private saving consistently managed to stay above 8.7 percent and well over 10 percent in most decades until 1910. The generations of Victorians during this period maintained a genuinely farsighted economic policy of leaving the country in a more financially secure state than they had been born into. Sometimes this meant sacrificing some economic growth in the short term for long-term sustainability, in other words, they delayed consumption to produce net national savings — money that could be used for the capital investments necessary to produce the next round of innovation and growth. This was an orientation which, in effect, put their children’s future ahead of their own present consumption. It was a policy which induced a low time preference. Such was their fiscal prudence that even the disaster of World War I, which negatively affected real growth did not reduce savings to less than 7.18 percent for the whole decade. However, as interventionist policies took root in the years of depression after the war, savings reduced in the 20s and 30s. The catastrophe of World War II saw a 3.5 percent dent in national savings. What we see, in effect, in the period from 1910 to 1950 is the abject squandering of eighty years of capital accumulation. In the post-war consensus that followed, we can see that despite a brief return to nineteenth-century style saving in the 1960s, national savings have since been in total free fall. To the extent that in the 2010s, they are now scarcely above zero. A glance at the following two graphs should make this more explicit.
FIGURE 3
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FIGURE 4
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Figure 3 shows Government Consumption as a Percentage of GDP, Figure 4 shows Net National Saving as a Percentage of GDP. The economic growth of the period from the 1950s to the 2010s may look more impressive on paper than that of the nineteenth century, even when using GDPP instead of GDP, but this masks the fact that this growth is something of a sugar rush. In effect, the economic policies of this period have reversed the mantra of the Victorians. It has sacrificed long-term sustainability for short-term growth. It has substituted delaying consumption to produce net national savings for present consumption at the expense of any savings at all. This is an orientation which, in effect, puts our present consumption ahead of our children’s future. It is a policy which induces a high time preference. It is a policy which, looking at the data above, as well as negative interest rates around Europe,Thorsten Polleit, "The ECB’s Renewed Attack on Free Markets," Mises Wire (June 25, 2019), available at: https://mises.org/wire/ecbs-renewed-attack-free-markets. is surely reaching the end of the line.
President Trump has proposed a one-year pay freeze for federal bureaucrats, which has reinvigorated the debate over whether compensation levels for the civil service are too lavish.
The Washington Post opines this is nothing but “government bashing,” but this chart from my former colleague Chris Edwards should be more than enough evidence to show that federal bureaucrats have a big advantage over workers in the economy’s productive sector.
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And there is plenty of additional evidence that federal employment is very attractive. For instance, it’s just about impossible to get fired from a bureaucracy.
Though defenders of the civil service sometimes make the preposterous claim that nobody gets fired because bureaucrats are such good employees.
The low rate at which federal employees are fired for poor performance doesn’t prove the government accepts it but instead “could actually be a positive sign,”… A report from the Merit Systems Protection Board in effect responds to members of Congress and others who contend that federal managers don’t care, or don’t dare, to take disciplinary action because of civil service protections. “…If the agency is successful in preventing poor performance…, a small number of performance-based removals could actually be a positive sign,” MSPB said. …Of the 2.1 million federal employees in a government database…, about 10,000 are fired for either poor performance or misconduct each year. …That low rate of firing has been cited in proposals to force agencies to take action… Individual employees, too, commonly express dissatisfaction with how agencies handle poor performers among their co-workers.
I have to confess that my jaw dropped when I read this article. Maybe we should ask veterans whether they think all federal bureaucrats do a good job?
Or we can ask non-profit groups whether they think IRS bureaucrats are top-quality workers? Or ask anyone who has ever tried to navigate the federal government?
We also know that the counties where most federal bureaucrats reside are now the richest region of the entire nation.
The three richest counties in the United States with populations of 65,000 or more, when measured by their 2016 median household incomes, were all suburbs of Washington, D.C., according to data released today by the Census Bureau. Eight of the 20 wealthiest counties with populations of 65,000 or more were also suburbs of Washington, D.C.–as were 10 of the top 25. …With Falls Church City included in the 2015 data, the nation’s four wealthiest counties were D.C. suburbs.
To be fair, this data is also driven by all the high-paid lobbyists. contracts, consultants, and others who have their snouts buried in the federal trough. So the incredible wealth of the DC region is really an argument for shrinking the size and scope of the federal government.
But the bureaucracy is part of the problem.
Interestingly, even the Congressional Budget Office concluded that bureaucrats are overpaid. And CBO almost certainly understated the gap, as noted in congressional testimony.
The CBO report’s headline figure is that, on average, federal salaries and benefits are 17 percent above private-sector levels. … I would consider the CBO’s reported federal compensation premium to be on the low end… when I analyze federal employee wages using the methodology that the progressive-leaning Economic Policy Institute has used in numerous studies of state and local government salaries, I find an average federal salary premium of not 2 percent but of about 14 percent. … The CBO chose to value federal employees’ pension benefits using a 5 percent discount rate. Using that discount rate, the federal employee retirement package was found to be substantially more generous than is received by comparable private-sector employees. But…corporate pensions are not nearly as safe as federal pensions, as witnessed by pending benefit reductions for “multiemployer” defined benefit plans. Valuing federal pension benefits using a lower discount rate to better reflect their safety would find a higher overall federal compensation premium.
Notwithstanding all this evidence, the unions representing bureaucrats nonetheless try to crank out numbers showing federal employees are underpaid.
To be sure, overall compensation levels don’t tell us everything. It is important to adjust for education, skills, and other factors.
Which is why the most useful, powerful, and revealing data in this debate is produced by the Bureau of Labor Statistics, which measures voluntary quit rates by industry. If there is a lot of turnover in a sector of the economy, that suggests workers are underpaid. But if there are very few voluntary departures, that suggests workers in that part of the economy are overpaid.
And the numbers from BLS clearly show that federal bureaucrats are far less likely to leave their positions when compared to employees in the private sector.
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This five-fold gap is staggering. I have lots of friends who work for the federal government. Most privately confess that they know that are making out like bandits. I think I’ll send this chart to the few holdouts.
By the way, I shared the numbers about quit rates for state and local bureaucrats back in 2011. Same story, though the compensation gap isn’t quite as large and may be driven mostly by unfunded fringe benefits.
P.S. I’m much more interested in shrinking government rather than shrinking pay levels. The correct pay for bureaucrats at the Departments of Transportation, Housing and Urban Development, Education, Energy, and Agriculture is zero. Why? Because those bureaucracies shouldn’t exist.
"You just follow the money. What happens is that you’re faced with a situation of shooting somewhere you want to shoot, versus somewhere you’d less rather shoot — and you get an extra three weeks of filming. It comes down to the fact that you have x amount of money to make your movie in a business where margins are really thin.” — Ben Affleck, on making films in Georgia over Hollywood, CA.
Few industries are more dominated by the left-wing political mindset than the film business. Despite the previous truth, filmmakers are ever in search of the lowest-cost way to produce their art. As the Affleck quote from above reveals in living color, lefty Hollywood follows the money, or better yet, the best tax deal. The super-rich industry that almost monolithically supports tax hikes on the rich is always and everywhere in search of the lowest taxes possible.
Taxes are a price, or a penalty levied on production. In that case it's no coincidence that so many movies are nowadays shot in Georgia. Hollywood’s best and brightest seek the lowest tax price (or better yet, the best tax incentive) to maximize profits in an industry defined by shrinking margins. The Peach State is very competitive on the tax front.
All of this is a reminder that when it comes to their verbal support for lofty wage minimums, the left speak with a forked tongue. Their commercial actions don’t match their redistributionist rhetoric. More important, their pursuit of that which most fattens their margins indicates that they well understand a broader truth that wage floors, or minimum wages are, in isolation, a barrier to work opportunity. High wage minimums price out certain workers must as high rates of taxation increasingly price out certain idyllic states — including California — as filming locales.
Stating what should be obvious, the minimum wage should be less than zero. Workers should be free to offer up their services at any price they want. This includes paying a business for the right to come to work. What movie aspirant wouldn’t pay Steven Spielberg to follow him around for a shoot, or for that matter, which aspiring entrepreneur wouldn’t pay Jeff Bezos a handsome sum for the right to shadow him at Amazon’s Seattle headquarters?
Speaking of Seattle, a recently released study by economists at the University of Washington (UW) indicated that a rising minimum wage in the Emerald City coincided with low-wage workers earning less money. Naturally members of the left questioned the study, while the right cheered it as validation of their belief in the minimum wage’s flaws. Arguably both sides missed the point.
About the existence of a minimum wage in Seattle, shame on the left for supporting that which restricts the right of businesses and workers to freely transact. The left’s support of wage floors is inexcusable.
As for whether or not the $13 wage floor limited work, it’s hard not to at least question the UW study. Figure that Seattle is booming. Presumably the bigger barrier to work there isn’t a mandated wage minimum as much as there’s a lack of low-wage workers relative to demand. Unknown is if the study revealed an exact correlation between rising hourly costs of low-wage workers and fewer work hours.
But even that’s not the point, and that it isn’t speaks to how the right routinely make the wrong argument against lefty intervention in the workings of the marketplace. Indeed, what if the same UW study had revealed rising earnings amid higher mandated wages? In a city like Seattle where two of the five most valuable companies in the world are headquartered, the latter would not be an impossibility. Would a different result have made the wage floors ok? When the right debate in terms of percentages, or in the case of the study, in terms of earnings, they’re to some degree handing the argument to the left as one about how to use government meddling to put people to work. But work is the easy part in a country like the US. The argument should solely be about freedom to transact. Always. Governments should have no say in how much businesses pay, or how much pay workers require in order to get up in the morning.
Yet the above argument is decidedly not the weakest one made by the right. The really silly one, one broadly offered by conservatives, concerns automation. Desperate to show they care more about low-wage workers than do interventionist lefties, members of the right constantly point to ongoing automation of low-wage work to show how cruel are wage floors. In fact, and if the correlation were real, automation would be the only reason to support that which is an offense to common sense.
Missed by a pandering right is that McDonald’s and other businesses that hire low-wage workers would be automating even if there was no minimum wage. More realistically, a total lack of a minimum wage would likely lead to even more automation. That’s the case simply because contrary to what right and left naïvely believe, low-wage workers are easily the most expensive for businesses to hire. Precisely because the work only rates low pay, and nearly always attracts the unskilled, few good workers want to stick with it for very long. As for those who do, that they would work for low wages for an extended period speaks to what lousy workers they are. Low-wage workers show up late, sometimes don’t show up at all, but most problematic is that they quit with profit-sapping frequency. Those who rate low wages are very expensive.
Henry Ford didn’t pay his employees above the market rate so that they would buy his cars, but instead did so because nosebleed rates of employee turnover at his eponymous company were costing him a fortune. Restaurants aren’t automating today to avoid paying minimum wages as much as the high rate of turnover among entry-level restaurant workers makes it too expensive to hire and train them at any price. Stating the obvious, automation speaks to freedom from the high cost of low wages.
So while the left’s support of the minimum wage is offensive, the right’s fight against what’s offensive perhaps explains why we still have wage floors. The right need to promote freedom of transaction while ever cognizant of the basic truth that businesses are desperate to automate away the work that only appeals to the least skilled. When they fight what is illogical with percentages and faux pandering, they’ve already lost.
The legacy of slavery in America is once again becoming a hotly discussed topic. The New York Times has launched The 1619 Project, commemorating the 400th anniversary of the first African slaves brought to the colony of Virginia. The project “aims to reframe the country’s history, understanding 1619 as our true founding, and placing the consequences of slavery and the contributions of black Americans at the very center of the story we tell ourselves about who we are.” One of the lead essays informs us that “in order to understand the brutality of American capitalism, you have to start on the plantation.” And over at Vox, an interview with historian Edward E. Baptist teaches us that slavery was a remarkably modern and efficient business practice, which helped the U.S. transform from a colonial economy into “the second biggest industrial power in the world.”
There are rhetorical and ideological concerns on both sides of this sensitive topic. The case for systematic reparations collapses, for example, if it turned out that slavery was an inefficient system that made blacks and whites—with a few notable exceptions—poorer. On the other hand, if the vision of The 1619 Project is correct, and modern America was built on slavery, then it would be silly for MAGA-wearing patriots to try to downplay the peculiar institution as an unfortunate footnote in the story of liberty.
In the present post, I am not going to weigh the historical evidence. For critiques of the “New History of Capitalism” (with its alleged reliance on slavery), see this article from Olmstead and Rhode, or this essay by Phil Magness.
Instead, I want to clarify the logical framework to show what it would mean to actually argue or demonstrate that slavery was an economically efficient method of production, which not only enriched those directly involved in the slave trade and labor sites, but also showered material benefits on the rest of (free) society at large. As we will see, in his Vox interview the historian Baptist doesn’t even attempt to make such a case.
Once we clarify the actual issue, it should be clear that slavery is like war: Yes, a few privileged elites can benefit financially from it, but it’s not “good for the economy.” Slavery, like war, is a destructive institution that reduces the welfare of most people in society, though a few beneficiaries can profit from the insidious system and thus have an incentive to sing its blessings.
Framing the Issue To understand if slavery is an “efficient” method of economic organization, we have to ask the standard economist question: Compared to what?
There is no doubt that a healthy adult slave in a region with adequate natural resources can produce more than a subsistence amount of output, allowing for the owner to keep the slave alive and keep the surplus for himself, living up to the Marxist vision of how labor markets work in general. So if the question is, “Was US output higher with millions of productive slaves working, than it would be if those slaves suddenly disappeared?” then the answer is, “Yes, of course, slavery was ‘productive’ in this sense.”
But that’s not really the question. The question is, if all of the plantation owners in (say) the year 1850 had suddenly freed all of their slaves and turned them into free laborers, what would that have done to the course of US economic development? Is it really true that this change would have made the country as a whole poorer?
The issue isn’t whether cotton was an important export, or whether the expected future flow of labor of the slaves was a valuable financial asset (codified in the market price received in auctions). The issue is whether had the slaves all been freed, would that change have made cotton exports grow more slowly over the 19th century, and would it have made the productivity of the (former) slaves’ labor grow more slowly? Those are the types of questions we need to answer, if we want to know whether slavery was a boon for American capitalism rather than a blight that was not only immoral, but also inefficient.
Baptist Doesn’t Even Try I was very excited to read the Vox interview with the historian Baptist, because at first he took on exactly the kinds of issues I’m discussing above. Here’s how the interview opened:
P.R. Lockhart
When you talk about the sort of myth-making that has been used to create specific narratives about slavery, one of the things you focus on most is the relationship between slavery and the American economy. What are some of the myths that get told when it comes to understanding how slavery is tied to American capitalism?
Edward E. Baptist
One of the myths is that slavery was not fuel for the growth of the American economy, that it actually the brakes put on US growth. There’s a story that claims slavery was less efficient, that wage labor and industrial production wasn’t significant for the massive transformation of the US economy that you see between the time of Independence and the time of the Civil War.
As I said, when I read this first exchange, I was very excited to see Baptist offer either arguments or empirical evidence refuting these (alleged) myths.
And yet he doesn’t even try. To be clear, I’m not saying that Baptist offered an argument that I found weak; he literally doesn’t even try (in the interview) to refute the “myths” that slavery was inefficient and slowed US growth.
To be sure, Baptist gives some statistics and facts. For example, he points out that the output of slave-using plantations increased greatly over time, and that the US economy grew in relative size on the world stage when slavery flourished.
Yet again, notice that these claims show nothing at all about the actual issue. We need to ask: Would the output of plantations have increased more had they been based on free labor? Would the US economy have been even bigger in (say) 1860 if slavery had never plagued America?
Look, I can just as easily use the same “evidence” as Baptist. From 1865-1965, the output of a field hand has grown tremendously, and the U.S. jumped ahead to be the #1 economy in the world, and cotton farmers got even more involved in sophisticated financial markets (dealing in futures and other options on their commodities). So there, I just “proved” that getting rid of slavery was a boon to the economy, upsetting the whole Baptist thesis, right?
Against Slavery The irony here is that you’d think the leftist opponents of slavery would be glad to hear my analysis. They are in the awkward position of explaining how beneficial slavery is to everybody else. So if they are right, then it’s only moral qualms that prevent a majority in a given region from enslaving the minority.
In contrast, I agree with the worldview of Ludwig von Mises. When making the case for classical liberalism, Mises didn’t need to appeal to altruism. No, he argued that slavery was an inefficient system:
The abolition of slavery and serfdom is to be attributed neither to the teachings of theologians and moralists nor to weakness or generosity on the part of the masters. There were among the teachers of religion and ethics as many eloquent defenders of bondage as opponents. Servile labor disappeared because it could not stand the competition of free labor; its unprofitability sealed its doom in the market economy. (Human Action, p. 625)
Indeed, you see a tacit recognition of this brute fact in the discussions of the Civil War. For example, a popular talking point is that “by the dawn of the Civil War, the Mississippi River Valley had more millionaires per capita than any other region.” Now the reason they have to put “per capita” in there, is that the South presumably did not have more millionaires than the North.
More generally, it’s just taken for granted that the North was richer than the South, and that’s why it was able to blockade and invade it during the (inaptly named) Civil War. If slavery makes your nation such a powerhouse, why didn’t the South conquer the North?
Conclusion Slavery was a monstrously unfair and immoral institution, but it was also inefficient, compared to a system based on free labor. Although I understand the rhetorical context of these arguments in regards to reparations and pride in U.S. history, it’s very dangerous to be making the case that enslaving others is the path to national greatness.
To return to Mises, he argued that the only way to end war was to get average citizens to realize that they were made poorer by conquest, even if their militaries won on the battlefield. In a similar manner, both in the interest of economic accuracy and long-run peace, academics should be teaching the masses that slavery benefits an elite few at the expense of everyone else, not just the slaves.
The US Census Bureau released new poverty data this month, and California once again has the nation's highest poverty rate, according to the "Supplemental Poverty Measure."
According to the SPM, California's poverty rate in 2018 was 18.1 percent, followed by Louisiana with 16.5 percent, and Florida, with 16.2 percent.
The states with the lowest poverty rates per the period were Iowa at 6.7 percent, Minnesota at 7 percent, and Kansas at 7.8 percent.
The 2018 report shows a slight general decline in poverty rates throughout the nation in recent years. According to the 2015 report, for example, California's poverty rate was over twenty percent, and the state with the lowest poverty rate — Minnesota — was at eight percent.
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The SPM measure contrasts with the old "official" poverty measure developed in the 1960s. The old measure tends to apply a blanket standard for poverty nationwide, but the SPM takes into account local housing costs and also " extends the official poverty measure by taking account of many of the government programs designed to assist low-income families and individuals."
Using the old measure, California ranks considerably better, because, of course, nominal incomes in California are considerably higher than in rural states and many other regions with much lower costs of living. Poverty rates in places like Mississippi, Louisiana, and New Mexico tend to be driven by low worker productivity, low-education levels, local corruption, and unfriendly business environments. But, the cost of living in these areas also tends to be relatively low, mitigating the effects of lower incomes.
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The situation is different in California where relatively high wages are often negated by very high living costs. And not surprisingly, California often dominates lists of the least-affordable housing markets in the United States.
Homelessness
The homelessness data coming out of California is also among the worst.
When it comes to homeless persons as a percentage of the overall population, California is the fourth-worst in the nation, behind only New York, Hawaii, and Oregon. 0.33% of California's population (or 33 people per 10,000) is estimated to be homeless on any given night, according to the Point-In-Time survey of homelessness.
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And while California is not the worst in terms of the proportion of the population that is homeless, the state is among the worst in delivering state services designed to lessen homelessness overall. Among the top-ten states with the highest percentage of homeless, California has the highest number of unsheltered homeless.For this number, and for total of chronic homeless, I use the totals from "Overall Homeless, 2018" "Unsheltered Homeless, 2018" and "Chronically Homeless, 2018." from "2007 - 2018 HIC Data by CoC (XLSX)" See: https://www.hudexchange.info/resource/3031/pit-and-hic-data-since-2007/. Nearly 69 percent of the homeless population in California is estimated to be on the street. Massachusetts, by contrast, provides shelter to over 95 percent of its homeless population. Unsheltered homeless are also far less likely to receive treatment for mental illness or urgent health issues.
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Some may note, of course, that Calfornia's warm weather, makes it easier for the homeless to be unsheltered. This is no doubt a factor, but if we look at Florida's homeless population, we find that 43 percent of the homeless population in that state is unsheltered — a difference of 25 percentage points. It appears unlikely that a warm climate is the only factor.
The importance of housing costs to the issue of homelessness is made more clear when we note that chronic homelessness is only a fraction of the total homeless population. It is sometimes suggested that the cost of housing is a not a significant factor in homelessness because most homeless persons — it is claimed — are mentally ill persons incapable of paying even a small rental fee.
The truth, however, is that in most cases, well over two-thirds of the homeless population is temporarily homeless. Many of these are families, many of whom have been evicted from housing due to missed rent payments, lost jobs, and other temporary situations. These events are made far worse and longer lasting by high rents and high housing prices. In California, for instance, only 26 percent of the homeless are chronically homeless. Most homeless people are people engaged in a search for permanent housing.
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Thanks to numerous land use, environmental, zoning, and building code restrictions imposed on builders in California, however, the cost of living remains extremely high in the state. The tax burden is among the highest in the nation, putting many middle-class earners far closer to the poverty line in case of temporary job loss. Even non-housing costs are well above most other states.
California may be the land of Silicon Valley billionaires, but thanks to the state's regulatory environment, the prosperity is rarely felt by people of more ordinary means. Wealthy residents don't want their views obstructed, and they don't want to have to look at low-cost housing on their drives to work. So, they work to ensure that government regulations minimize new housing construction, thus further driving up housing prices and rents. New housing construction isn't keeping up with population growth.
High taxes are a burden on the middle and lower-middle classes. Regulations make it harder to start and sustain a business.
Nor surprisingly, the result is a state with the highest poverty rate in the nation and the nation's fourth-largest homeless population per capita.
Why the Cost of Living Matters Although the SPM measure of poverty clearly provides a broader measure of poverty incorporating both social programs and housing prices into calculations, many leftwing columnists insist on using the older poverty rate measure — while ignoring the homelessness data — because the older measure makes states like California look better.
For example, wealthy investor Ken Fisher, writing in USA Today, claimed last year that the "poorest states have Republican legislatures, and richest have Democratic ones." He writes: "Eighteen of the 19 poorest states have legislatures where both chambers are Republican controlled. New Mexico (46th richest, fifth poorest) is Democratic. But there isn’t another blue or purple state until you get to purple Maine... But all five richest states have both legislative chambers controlled by Democrats – Maryland, New Jersey, Hawaii, Massachusetts and Connecticut. Overall, Democrats dominate the 20 richest states."
Fisher was using rankings published earlier by USA Today, which relied heavily on the old poverty rate measure, and which used nominal median incomes not adjusted to local cost of living factors. If we do make that adjustment, things look very different.
Fisher's analysis thus relies almost totally on nominal income numbers, and ignores how expensive it is to live in places like New York and California.
For most regular people, however, leaving California may be the best thing one can do to increase one's real income and have a chance at a life that doesn't involve working long hours to afford a fixer-upper that costs half-a-million dollars.
There is, after all, a reason California is exporting its poor to places like Texas.
Anti-capitalists on both left and right tell us that "capitalism" is destroying the weekend. The conservatives insist we need laws to punish people who try to sell things on Sunday. Leftists insist "unbridled capitalism" is destroying the weekend, which "lets us cultivate the seeds of civil society … "
But it's not capitalism that's doing this dirty work. The decline of the weekend comes from the decline of religiosity, and the fact many Americans would rather work more — so as to buy more goods and services — than enjoy leisure time.
The decline of the weekend is a bottom-up phenomenon. It's not forced on us from above by corporate CEOs and bankers.
There was a time, though, when the weekend was completely abolished from above; when an entire society was forced to work around an ever-changing and never-stopping work schedule designed to maximize output and to reduce allegiance to family or religion.
Those were the days of the "nepreryvka" a continuous work week designed by — who else? — Soviet communists.
Through mid-1929, workers in the Soviet Union had a standard six-day workweek. Working on Saturday was still a common practice in most of the world. Even in the United States, working half days on Saturday would be common into the early 1950s. But Sundays, even in the USSR, were a common day off when factories were idle and workers largely stayed at home with family.
Stalin, however, didn't like the idea of equipment idling for an entire day. Moreover, having a continuous seven-day week would give state managers more flexibility in scheduling shifts throughout the week.
In late September 1929, the Soviet state implemented a new system of continuous labor. This didn't mean individual workers worked seven-day weeks — five- and six-day workweeks were staggered throughout the month instead. But this did mean that there was no common day during which family members could reasonably expect to be at home on the same day at the same time.
Workers naturally complained:
What is there for us to do at home if our wives are in the factory, our children at school and nobody can visit us? It is no holiday if you have to have it alone.” Another griped: “How are we to work now, if mother is free on one day, father on another, brother on a third and I myself on a fourth?
From the perspective of the communist central planners, this was an added bonus. In the Marxist mind, the family was a hated bourgeois relic of capitalism. If the new work system made it impossible for families to meet up on a schedule, that was all to the good.
And, of course, by abolishing Sunday as a weekly holiday, the new system made it extremely difficult to attend church services on a regular basis. Thus, in one move, the Soviets were able to strike a blow against both families and religious institutions. All that was left was the state — and the state-mandated labor.
Participation in this system, of course, was not optional. Political scientist Paresh Chattopadhyay notes:
"Socialist full employment" policy was carried to the hilt by demanding in 1930 that "no reasons to refuse the work offered are to be taken into consideration excepting ill-health, confirmed by a hospital certificate." …
[A] whole series of measures were adopted by the Soviet authorities during the 1930s to discipline the newly recruited proletariat — such as, measures concerning punishment against absenteeism, introduction of "labor books", prohibition of voluntary mobility as between work places.Paresh Chattopadhyay, The Marxian Concept of Capital and the Soviet Experience (Westport: Praeger, 1994), p. 65, https://libcom.org/files/the%20marxian%20concept%20of%20capital%20and%20the%20soviet%20experience.pdf.
These policies were applied primarily to men. But women joined the workforce in ever greater numbers as well. Impelled by a low standard of living, personal preference, and by policies that devalued domestic work, the percentage of women in total employment steadily rose from 27 in 1932 to 39 in 1940.Ibid.
As one would expect from the Soviets, the system did not work as well as hoped.
It was easy enough to order people to work at specific times and work a specific number of hours. But labor is just one component of a functioning economy. The Soviets found it incredibly difficult to manage raw materials and fuel supplies so that they could flow into factories to keep up with demand as workers and machines were placed on a more robust schedule.R. W. Davies, The Industrialisation of Soviet Russia 3: The Soviet Economy in Turmoil 1929–1930 (London: Palgrave MacMillan, 1989), p. 86. As a result of shortages in fuel, necessary parts, and other essentials, equipment was often left idle. Moreover, early on in the experiment, a lack of down time for equipment meant more frequent malfunction. Workers didn't have enough time to repair and maintain equipment. The central planners soon retreated on his, however, and were forced to allow for more idling of equipment.
The grandiose plans for nepreryvka thus led to even more idle factory time than before in some cases.
In spite of all these issues, however, national production increased from 1929 to 1930.Ibid., p. 252. One could not describe this system as more efficient, however. The disruption to basic cultural patterns of life took their toll on workers, and much of the increase in production during his era was made possible by a workforce that grew at a faster pace than the the overall population. This was largely due to the growing participation of women in the industrial workforce.
Ultimately, the problems with the continuous work week piled up and the nepreryvka was finally discontinued in 1940.
It was just too difficult to uproot the system of the seven-day week and the deep-seated cultural habits it facilitated.
This didn't mean a return to "normal." The Soviet economic system never solved the problem of motivating workers and maximizing output — "maximization" was defined by the state, of course. After nepreryvka, right up until the end of the regime, the Soviets used every trick in the book. For example, the soviets employed compulsory third shifts for many workers in the middle of the night. But even in these days of heavy punishments for disobedience, more highly-ranked and technical staff were often absent and one government report complained "each shift goes off without waiting for the next."Ibid. p. 254. Contrary to the idea that workers under a communist system are paid a "living wage" no matter what, labor regulations stipulated workers would only be paid for being productive. Many workers, for example, were paid for "piece work." That is, they were only paid for each item they produced. Construction projects were only paid in accordance with what had been budgeted by government edict. If a project went over budget, someone had to absorb the difference. And that "someone" was never high-ranking communist officials. In other cases, if equipment stood idle — even if due to an absence of needed parts never delivered by others — "hours spent idly … would be paid at only 50 percent of the normal rate, that is to say next-to-nothing."Fyodor Turovsky, "Society without a Present," in The Soviet Worker, ed. Leonard Shapiro and Joseph Godson (New York: St. Martin's Press 1981), pp. 168-169.
By the 1970s, though, actual production was so anemic that few workers were paid in line with what they produced. Had they been, many would have starved. So mid-level managers regularly falsified paperwork to make workers and factories seem more productive than they were. Eventually, the system became one in which workers were earning little, but producing even less.
At that point, its unlikely even a seven-day workweek would have saved the system from collapse. Fortunately, the Soviet state was, by then, too weak to try it.
[Chapter 13 of The Conquest of Poverty.]
For more than a century the economic thinking not only of the public but of the majority of economists has been dominated by a myth — the myth that labor unions have been on the whole a highly beneficent institution, and have raised the level of real wages far above what it would have been without union pressure. Many even talk as if the unions had been chiefly responsible for whatever gains labor has made.
Yet the blunt truth is that labor unions cannot raise the real wages of all workers. We may go further: the actual policies that labor unions have systematically followed from the beginning of their existence have in fact reduced the real wages of the workers as a whole below what they would otherwise have been. Labor unions are today the chief antilabor force.
To realize why this is so we must understand what determines wages in a free market. Wage rates are prices. Like other prices they are determined by supply and demand. And the demand for labor is determined by the marginal productivity of labor.
If wage rates go above that level, employers drop their marginal workers because it costs more to employ them than they earn. They cannot long be employed at a loss. If, on the other hand, wage rates fall below the marginal productivity of workers, employers bid against each other for more workers up to the point where there is no further marginal profit in hiring more or bidding up wages more.
So assuming mobility of both capital and labor, assuming free competition between workers and free competition between employers, there would be full employment of every person wanting and able to work, and the wage rate of each would tend to equal his marginal productivity.
It will be said — it has in fact repeatedly been said — that such an analysis is merely a beautiful abstraction and that in the actual world this mobility and competition of labor and capital do not exist. There is, some economists have argued, in fact a wide range of "indeterminacy" in wages, and it is the function of unions to make sure that wage rates are fixed at the top rather than the bottom of this range or zone.
We cannot reply that this indeterminacy theory is wholly wrong; but what we can say is that in relation to the problem of unions it is unimportant. The indeterminacy theory is true of wages only to the extent that it is true of other prices: it is true where the market is narrow or specialized. It is true, say, of highly specialized jobs in journalism, or in the universities, or in scientific research, or in the professions. But wherever we have large numbers of unskilled workers, or large numbers of approximately equal special but widespread skills — such as carpenters, bricklayers, painters, plumbers, printers, train-men, truckdrivers — this zone of indeterminacy shrinks or disappears. It is the craft unions themselves who insist that their individual members are so nearly equal to each other in competence that all should be paid on equal "standard" wage. And so we have the paradox that the unions exist and flourish precisely where they are least necessary to assure that their members get a market wage equal to their marginal productivity. It is true, of course, that an individual union can succeed in forcing the money wage rates of its members above what the free market rate would be. It can do this through the device of a strike, or often merely through the threat of a strike. Now a strike is not, as it is constantly represented as being, merely the act of a worker in "withholding his labor," or even merely a collusion of a large group of workers simultaneously to "withhold their labor" or give up their jobs. The whole point of a strike is the insistence by the strikers that they have not given up their jobs at all. They contend that they are still employees — in fact, the only legitimate employees. They claim an ownership of the jobs at which they refuse to work; they claim the "right" to prevent anybody else from taking the jobs that they have abandoned. That is the purpose of their mass picket lines, and of the vandalism and violence that they either resort to or threaten. They insist that the employer has no right to replace them with other workers, temporary or permanent, and they mean to see to it that he doesn't. Their demands are enforced always by intimidation and coercion, and in the last resort by actual violence. So wherever a union makes a gain by a strike or strike threat, it makes it by forcibly excluding other workers from taking the jobs that the strikers have abandoned. The union always makes its gains at the expense of these excluded workers.
Overlooking the Victims It is amazing to find how systematically the self-proclaimed humanitarians, even among professional economists, have managed to overlook the unemployed, or the still more poorly paid workers, who are the victims of the union members' "gains."
It is important to keep in mind that the unions cannot create a "monopoly" of all labor, but at best a monopoly of labor in certain specific crafts, firms, or industries. A monopolist of a product can get a higher monopoly price for that product, and perhaps a higher total income from it, by deliberately restricting the supply, either by refusing to produce as much as he can of it, or by withholding part of it, or even by destroying part of it that has already come into existence. But while the unions can and do restrict their membership, and exclude other workers from it, they cannot reduce the total number of workers seeking jobs.
Therefore whenever the unions gain higher wage rates for their own members than free competition would have brought, they can do this only by increasing unemployment, or by increasing the number of workers forced to compete for other jobs and so comparatively reducing the wage rates paid for such jobs. All union "gains" (i.e., wage rates above what a competitive free market would have brought) are at the expense of lower wages than otherwise for at least some if not most nonunion workers. The unions cannot raise the average level of real wages; they can at best distort it.
As the gains of union workers are made at the expense of nonunion workers, it is instructive to ask what proportion union members constitute of the whole working population. The answer for the United States is that union members now number about 20 million, or not more than 25 percent of the total civilian labor force of 87 million. So the unions are in a distinct minority. This might not be a fact worth emphasizing if there were reason to think that the average earnings of union workers were below the average earnings of nonunion workers. But while statistical comparisons cannot be exact, the evidence is conclusive that the case is the other way round. It is the most skilled occupations that are most unionized. In brief, we have a one-quarter minority of already higher paid union workers exploiting a three-quarters majority consisting mainly of already lower paid nonunion workers.
People could save themselves a good deal of misplaced sympathy if next time they read in their newspapers of a strike for a "decent wage," they take the trouble to compare what the strikers were already getting with, say, the official statistics of average wages for all nonagricultural workers.
The "gains" of union labor, of course, need not be solely at the expense of nonunion labor; they may be at the expense of some union members themselves. The higher wage rates gained in a particular industry (assuming an elastic demand for its product) will lead to less employment than otherwise in that industry. This may force unemployment on some of the members of the "successful" union. The result may then be that smaller aggregate wages will be paid in that industry than if the higher wage rate had not been successfully imposed.
In addition, any union's "gains" (continuing to use "gains" in the sense of any excess over what would have been free-market wage rates) will be at the expense not only of unemployment or lower pay for other workers, but at the expense of consumers, by forcing them to pay higher prices. But as the great bulk of consumers consists of other workers, this means that these gains will be at the expense not only of nonunion workers but also of other union workers. The real wages of the mass of workers are reduced whenever they have to pay higher prices. Once it is clearly recognized that the strike-threat gains of each union are at the expense of all other unions, in forcing their members to pay higher prices for products, the whole myth of "labor solidarity" collapses. It is this myth that has kept the strike-threat system going. It has created sympathy for strikes and tolerance of the public harm they do. The mass of the working population has been taught to believe that all workers should support every strike, no matter how disorderly or for what unreasonable demands, and always to "respect the picket lines," because "Labor's" interests are unified. The success of any strike is thought to help all labor and its failure to hurt all labor.
The Great Illusion This is the modern Great Illusion. In fact, each union's extorted "gains," by raising a specific industry's costs and therefore its prices, reduce the real wages of all other workers. The interests of the unions are mutually antagonistic.
I have been talking so far about the damage done by strike settlements, or by "gains" extorted under the threat of strikes; I have not yet talked about the damage done by the strike itself. While strikes are ostensibly directed against the employers, most of them are in fact directed against the public. The idea is that if enough hardship is inflicted on the public, then the public will insist that the employer capitulate to the strikers' demands.
There are too many instances of this to list. For examples one need not go outside of New York City in recent years. A bus and subway strike. A strike of garbage collectors, bringing filth, stench, and the threat of an epidemic. A strike in late December, 1968, of fuel-oil deliverers and oil-burner repairmen, during an extreme cold spell and flu epidemic, when at least 40,000 persons in thousands of multiple dwellings were reported to be seriously ill and were deprived of heat. A strike of 20,000 employees of the Consolidated Edison Co., which supplies the electric power for New York. Grave-diggers' strikes. Hospital employees' strikes.
The chief leverage of the strikers, in securing capitulation to their demands, was the amount of hardship and suffering they were able to inflict, not directly on the employers, but primarily on the public. Yet who are the public? They are in the main other workers, including other union members. They may even be members of the striking union itself and of their families. A striking fuel-oil deliverer's own children, for example, may be sick and shivering because no fuel has been delivered. This is the absurdity of "labor solidarity." This is the folly of a "general strike." Such a strike is suicidal for the workers themselves.
This is a war of each against all. The minute division of labor in our modern industrial society, which makes our society so productive, also makes it increasingly interdependent. So each of hundreds of unions successively tries to exploit the community's dependence on that type of worker's special services and on the harm it can do by withholding them and preventing anybody else from supplying them. A huge motor truck can be brought to a halt if someone removes either the carburetor, or the distributor, or the battery, or a single wheel, or even disconnects a single tiny wire. In the same way the industry of a country can be brought to a halt while the workers in a single small branch proudly demonstrate the indispensability of that branch's specialized services.
But how could it have come to be seriously believed that this disorderly, haphazard, violent, extortionate, obstructive, piece-meal, every-union-for-itself scrimmage is the way to promote "social justice?" So far from the strike-threat system promoting cooperation within the "labor movement," each union leader, to hold his job, tries to prove that he can get more for the members of his particular union than others can get for their unions. This is a competition in leap-frogging, with each union trying to end up as the one on top of the heap.
I have yet to see any serious or self-consistent exposition anywhere of the union theory of wage formation. I have yet to hear any union apologist, for example, try to determine scientifically exactly how much the members of a particular union are being underpaid, how much of an increase they are justified in demanding, and how much would be too much. The union leaders have one simple formula for every situation: more.
Insofar as they do have an implied theory it seems to be some obscure form of the Marxist exploitation dogma. They never suggest that wages can be rightly determined in a free market. The employer, one gathers, never voluntarily pays what is "fair," but raises wages only in response to a strike threat or "tough bargaining" on the part of the union leaders. And the gains that the union wins for its members are solely at the expense of the employer and of his "excess profits." The gains of the workers simply leave less for the capitalists.
Now this can indeed be true in a particular industry and for the short run. When capital has already been invested in a particular industry, in expensive specialized plant or heavy equipment — say in a railroad, a steel plant, or an automobile plant — that capital is locked in — is held hostage, so to speak — and it is possible for unions to exploit it. The plant will continue to be operated, and to employ labor, as long as it can still earn anything above running expenses, regardless of how little it yields on already invested capital. But new fixed capital will not be invested in that plant or industry, at least not until it can once more earn as much return as new capital invested else-where. Meanwhile that industry will not expand, or will actually shrink, and employment in it will decline.
Discouraging Capital Investment This result will follow not only because of the success of previous strikes or strike threats in that particular industry. When strike threats have become chronic in an industry, and seem likely to be systematically repeated, new capital and new investment will no longer venture into that industry. Union tactics may even end by discouraging and gravely reducing new investment everywhere.
Hence the strike gains of unions are at best short-run gains. In the long run they not only reduce employment but reduce the real wages of the whole body of workers. For the productivity of industry — and the real wages of workers — are dependent on the amount of investment of capital per head of the working population. It is only because American manufacturing industry has invested more than industry in any other country — some $30,000 for every production workerEstimate for 1968 by The Conference Board, "Road Map to Industry," No.1676. — that American wages so greatly exceed wages in any other country.
Labor unions can only exploit capital already invested, and they can do this only at the cost of discouraging new investment. By discouraging new investment, by discouraging maintenance, expansion, and modernization, labor unions in the long run reduce real wages below what they would otherwise have been.
But this is not the only way in which labor unions reduce real wages. They do so, and they have done so since the beginning of their existence, by jurisdictional disputes, by forcing the employment of more workers than are necessary for a particular job, by systematic hostility to piecework, by forcing slow-downs, soldiering and malingering on the excuse that they are combatting unreasonable speed-ups, and by countless other featherbedding practices.
In a famous review of William Thornton's book on labor, John Stuart Mill wrote in 1869:
Some of the Unionist regulations go even further than to prohibit improvements; they are contrived for the express purpose of making work inefficient; they positively prohibit the workman from working hard and well, in order that it may be necessary to employ a greater number. Regulations that no one shall move bricks in a wheelbarrow, but only carry them in a hod, and then no more than eight at a time; that stones shall not be worked at the quarry while they are soft, but must be worked by the masons at the place where they are to be used; that the plasterers shall not do the work of plasterers' laborers, nor laborers that of plasterers, but a plasterer and a laborer must both be employed when one would suffice; that bricks made on one side of a particular canal must lie there unused, while fresh bricks are made for work going on upon the other; that men shall not do so good a day's work as to "best their mates"; that they shall not walk at more than a given pace to their work when the walk is counted "in the master's time"—these and scores of similar examples … will be found in Mr. Thornton's book.
These depressingly familiar practices, in short, have been going on for more than a century. The unions, far from "maturing," show not the slightest sign of abandoning them, but create more unreasonable obstacles than ever, still combat the introduction of labor-saving machinery, refuse to accept discipline, and undermine more and more management's ability to manage. To reduce productivity is to reduce wages. These short-sighted practices can only have the long-run effect of keeping real wages far below that they could otherwise be.
Unions and Inflation It remains to say a word about the effect of unions on inflation. Contrary to a widespread opinion, unions do not directly cause inflation by using strikes or strike threats to force wage rate increases. The normal economic result of such excessive wage rate increases would simply be to wipe out profit margins and create unemployment. But under the influence of Keynesian ideology and present political pressures, it is assumed to be the duty of the monetary authorities to issue more money to raise prices to make the higher wages possible and payable. As long as this ideology lasts, wage increases forced by unions will lead to progressive inflation. This process must eventually collapse, with disastrous consequences. Meanwhile, by forcing faster increases in money wage rates, it further promotes the popular illusion that unions raise real wages.
I have hitherto not explicitly mentioned a very important point which consistently escapes the Keynesians and all union apologists. A distinction that must be constantly kept in mind is that between wage rates and total payrolls or aggregate wage income. Whenever higher wage rates lead to more than proportionate unemployment they reduce labor's total income. Therefore such forced wage rate increases are not a gain for labor but a loss for labor. But the union leaders and the union apologists put all their emphasis on winning higher wage rates.
To sum up. The net overall effect of union policy has historically been to reduce productivity, to discourage new investment, to slow down capital formation, to distort the structure and balance of production, to drive nonunion members into lower paid jobs, and to reduce the total production and the total real wages and real income of the whole body of workers below what it would otherwise have been.
The rates of wages that are best for the workers as a whole are those that are determined in a free market. There are, no doubt, areas in which the activities of unions, wisely directed, could be on the whole beneficent — in negotiating with individual employers, for example, concerning hours of work and such conditions of work as light, air, sanitary arrangements, rest rooms, coffee breaks, shop rules, grievance machinery, and the like. But wherever the unions are allowed to use violence and coercive tactics to achieve any aim, the long-run result is bound to be bad for the workers themselves. This being so, what should be the public's attitude toward labor unions, and what should be the legal framework in which they operate?
The public must recognize, first of all, that the interests of unions and union leaders are by no means identical with the interests of labor as a whole, and that being pro-union is by no means synonymous with being pro-labor.
In accordance with the principle of freedom of peaceful association, the law should not prohibit unions, but neither should it go out of its way to encourage them. Certainly the government should not continue, as it does in the United States, to turn itself in effect into a union-organizing agency and to force employers to negotiate with unions. And under no conditions should the law — or the law-enforcement officials — tolerate union violence, vandalism, or intimidation.
To translate this into more concrete terms: American Federal, state and city governments need not forbid unions of their own employees, but neither should they have any obligation to recognize, consult, or negotiate with such unions in fixing compensation or conditions of work. Under no conditions should they tolerate a strike by public employees. Public officials have been notoriously spineless in dealing with unions, but the law should give them wide discretion in deciding what penalties to impose, from loss of pay and mild fines to suspension or permanent dismissal. None of these penalties will be effective, of course, unless public officials also have a clear right to hire immediately temporary or permanent replacements for the strikers.
For private industry the minimum need is (1) the complete repeal of the Norris-LaGuardia Act of 1932 — which in effect denies injunctive relief during a strike to employers and non-strikers from violence, vandalism, and intimidation — and (2) the repeal of the Wagner-Taft-Hartley Act of 1935 and 1947 — which compels employers to recognize and "bargain collectively with" specified unions, and in effect make concessions to them. Repeal of these and other laws would merely return the United States to the pre-1932 Federal legal situation. In addition, however, all mass picketing should be forbidden, as well as any picketing whatever that involves harassment or intimidation.
The century-old tolerance on the part of public officials of union coercion and violence is in large part a product of the myth that such violence is necessary to secure "fair wages" and "justice for labor." Not until this myth is destroyed can we hope to have industrial peace, orderly economic progress, and maximum real income for the great body of the workers.
Capitalism creates poverty. Capitalism has stolen our future. Capitalism ravages the planet. Capitalism oppresses us. Capitalism needs to be controlled by government or it will throw most of us into poverty and misery and enrich only the well-placed few.
These are not missives from The Nation or the Daily Worker, although no doubt the writers from those publications would share the sentiments. No, these diatribes against the market economy come from the American Conservative. Of course, it is hardly the only conservative publication that rails against the market system, as First Things can also be counted on to speak out against the evils of an economy based on private property, a price system, and profit and loss. For that matter, before it fell to the grim reaper, the Weekly Standard also raised its voice against markets. Pat Buchanan has been railing against free trade and free markets for years.
So, what is the case that conservatives make against a market system, and how do they justify the kind of government intervention that perhaps in a sober moment they might realize will have the opposite effects of what is allegedly intended? What is the so-called case against the market, and why do some conservatives believe that coercion can create a better economy and better society?
There are numerous issues that we must examine to answer these questions, and the first is this: what exactly is the conservative case against the market? Why are prominent conservatives attacking capitalism?
In a word, change. Capitalism brings change, and bedrock conservatism is anti-change at its core. To better understand that point, we need to go back nearly seventy years to the 1950s, a time that apparently both conservatives and progressives wish to freeze in time. Whether one reads Pat Buchanan or Paul Krugman, the message seems to be similar: this was a golden era for American workers and businesses, a time when the government tightly managed the financial system and key industries were heavily regulated, from transportation to telecommunications.
In a recent article, the American Conservative declared that during the 1950s organized labor “gave capitalism its ballast.” Writes James Pinkerton:
In fact, for a time after World War II, America’s national political leadership was mostly reconciled to strong unions, abuses and all — because the alternative was deemed vastly worse.
In those mid-century years, people remembered what it was like when unions were weak or nonexistent, when unfettered capital was free to grind the face of labor. Such immiseration was seen as a leading cause of the Bolshevik Revolution in Russia — and nobody wanted that to happen here.
Moreover, the Great Depression was an even more recent memory. Thus the Keynesian wisdom held that it was vital to boost workers’ pay so as to keep purchasing power in their hands; they could, after all, be counted on to spend their money and thereby keeping the economy going. In those years, fear of a Depression-ish capital strike was far stronger than fear of a labor strike.
Ballast balances ships to keep them from capsizing at sea. In Pinkerton’s view, organized labor kept the economy “balanced” by keeping “unfettered capital” at bay and preventing it from oppressing labor.
Economically speaking, such a statement only can be called nonsense. As Carl Menger so aptly put it in his 1871 Principles, it was the development of capital goods that raised living standards and provided labor with real wealth increases. Far from grinding the face of labor, it was private capital — and capitalism — that gave them the benefits that people like Pinkerton attribute to the violence of organized labor.
Writing about labor and the 1950s, Pinkerton declares,
strong unions shaped society. Picket lines were not to be crossed, and work rules — detailing which worker could do which job — were strictly enforced (unless there was a payoff).
To anyone much younger than a Baby Boomer, the impact of unionization is hard to comprehend, because over the last four or so decades, we simply haven’t seen incidents such as the one in 1956, when the Teamsters blocked all deliveries to the Waldorf Astoria in Manhattan because of a jurisdictional dispute over the hotel’s barbers.
Still, this Baby Boomer, who grew up near Chicago, well remembers what it was like to live in a strong union town. For instance, meat wasn’t for sale on Sundays. Why not? Because the butchers had work rules to prevent such selling — and that was that. Then there was McCormick Place, the big convention center that was a steady source of scandal-mongering newspaper stories: about union featherbedding, prohibitive labor costs, and the occasional disappeared load of cargo.
Of course, sometimes, union matters got worse than that: incidents of union-related strong-arming, leg breaking—even the occasional murder—were in the news.
Nothing Pinkerton has described can build an economy, and it certainly cannot build wealth. Instead, he has described classic plunder, in which people seeking the opportunity to make a living were beaten, threatened, and even murdered for the “crime” of wanting to do something without the permission of organized labor. And according to the American Conservative, we should want to return to such a regime, which supposedly dominated the 1950s.
Perhaps we should be wary of labeling the 1950s a golden era, even though the theme of the 1950s as Oz reverberates from Paul Krugman to Pat Buchanan to Tucker Carlson. To Krugman, marginal tax rates were 90 percent and organized labor ruled the workplace, which, in his view, preserved a balance in US society that no longer exists. Conservatives like Buchanan see American industry from steel to automobiles to textiles as having been seemingly unchallenged in the world, protected by tariffs double the rates we see today.
That idyllic economic landscape, in Buchanan’s view, disappeared in the 1980s, when Americans began to buy goods, from automobiles to clothing, that were imported. Workers in Third World lands that once sold Americans nothing at all began to undercut the high American wages that both Krugman and Buchanan believe were central to US prosperity. As Buchanan and other conservative critics of the market economy put it, less protectionism and the lure of “slave wages” overseas enabled capitalists to gear their investments “in a race to the bottom.” Such a scenario did not exist in the 1950s. Make cars in Mexico and in South Korea? Not a chance.
Before we call for the return of tax, labor, and trade policies in the decade of poodle skirts, sock hops, and ubiquitous picket lines, however, we should remember that a third of Americans then lived in poverty, much of it abject. Jim Crow laws were on the books, and racial discrimination was embedded in American life in a way that most people today would not be able to comprehend. The government organized key industries, from banking and finance to all forms of transportation and telecommunications, into regulated cartels that forced Americans to pay higher prices for just about everything. If you wanted economic opportunity, you usually needed a union card or a connection to government regulators and politicians.
Yet, there is an appeal to the nostalgia of the company towns and the seeming stability of the working-class towns. I lived in such a place in southeast Pennsylvania from the mid-1950s to mid-1960s, until I was almost eleven years old, and I remember knowing people who worked at places like US Steel, the Sun Oil refinery, Ford Motor Company, Baldwin Locomotive Works, and Sun Shipbuilding. Ours was a middle-class town, and it was the rare worker that was not a member of a labor union.
The industries that once buttressed my former hometown no longer exist, from the oil refinery two miles from my house to the other manufacturing facilities that employed my neighbors. They are shuttered, many of the buildings and fixtures sold for scrap or having been transformed into large, empty lots. This is Rust Belt scenery and the ruin porn is repeated on the Eastern Seaboard and in towns in Ohio, Pennsylvania, Michigan, and elsewhere. Many old working-class towns once held together by a single manufacturing plant that has closed are left to struggle, and some places are transformed into what some have called the “Heroin Belt.”
Conservative critics tend to agree with politicians like Bernie Sanders and Elizabeth Warren about the cause of this economic and social decline, and they increasingly are willing to accept the “solutions” these politicians are demanding, from high tax rates on businesses and individuals to both internal and external protection. And like Sanders and Warren, these conservative market critics blame “corporate greed” for the changes that new investment patterns bring to once prosperous manufacturing communities.
Like those on the Left, the anticapitalist conservatives want to preserve those places that we remember from years ago. What they fail to comprehend is that demanding that government hold back changes in capitalization along and in the methods by which firms make things, they also are demanding that government restrict changes in everything else. To put it another way, we cannot preserve the 1950s manufacturing economy and the mill village without restricting changes in the quality of medical care we receive, in telecommunications, and in transportation.
The old socialist countries provide an insightful lesson regarding the “freezing in time” syndrome. People who have visited places like present-day Cuba or spent time behind the Iron Curtain when the USSR and the eastern European satellites were in existence note that in many ways going there was like entering a time warp. However, this was not the experience one has when visiting an “old town” section of a modern city to see examples of lovely architecture from the past.
Instead, although the old architecture might have dominated in, say, Havana or Prague before the 1990s, everything looked old and run down. Yes, there was evidence of some of the glory of the old days, but for the most part, these places would evince grime, disrepair, and the lack of hope. If one does not want change, then one should go to Havana, where even the 1956 Chevys still are on the road.
For that matter, one does not need to bring back memories of communism to find examples of how the lack of change and development because of government restrictions can have negative effects. Look at American railroads before and after deregulation. As Milton Friedman pointed out in Free to Choose, the US rail system pre-1980 looked like something from the 1950s, and he contrasted the railroads with the US automobile industry, which was already coming out with new models every year.
Since the Jimmy Carter administration ended nearly a century of federal regulation of the railroad industry in 1980, American railroads have become a major factor in a stronger US economy. Michael Grunwald wrote in Time Magazine in 2012:
It’s not just that they are self-sufficient and fuel-efficient, employ 175,000 workers and have poured $500 billion into their trains, tracks and terminals since 1980. They are also quite literally the engines of our economy. America’s passenger rail is a global joke, but our freight rail is the envy of the world, carrying over 40% of our intercity cargo. Trains carry much less of Europe’s freight, which is why trucks clog Europe’s highways. And America’s rail-shipping rates are the world’s lowest, reducing the cost of doing business in the U.S.; they’ve fallen 45% in real dollars since the industry was deregulated three decades ago.
One only can imagine the objections we would hear today from TAC and conservative journalists such as Tucker Carlson if such a deregulatory proposal was to be presented today. "What about economic concentration?" "The railroads will jack up prices!" "Good service will disappear!" "What about safety?" "Won’t there be more derailments and rail accidents?" And so on.
The conservative case against free markets is based on the belief that if change disrupts the status quo in any way, or if companies impose cost reductions that result in a shifting of employment — or even some layoffs — then government should step in and take control. Now, I should add that the conservatives are not advocating outright state ownership or control — or at least that is what they are saying.
Of course, the notion that government will just regulate a little bit and only restrict a few things is fantasy. Likewise, anyone who believes that government regulation will reduce alleged economic concentration does not know the history of regulation. Before the late 1970s and early 1980s, the government essentially organized several industries into regulatory cartels, including passenger airlines, trucking, railroads, banking, and telecommunications. One might recall the numerous railroad bankruptcies that resulted in the formation of Conrail, which was nothing more than a government rail firm that covered the East Coast.
Telecommunications? The only game in town was AT&T and phone service was primitive compared to what it would become only a decade after the end the old regulatory regime. A relative free market transformed the rail industry, and trucking also has vastly increased its hauls. These industries are much more competitive now that government does not control rates and routes.
Since 1980, American living standards have increased in ways that no one then could have predicted. Free markets have played a major role, and one would think that conservatives would appreciate that fact. Instead, they present a picture of wise and paternalistic government that somehow can provide prosperity but still preserve our imaginary Norman Rockwell world.
Capital accumulation and productivity growth are the outcome of free market investment and not of government spending. This is well known to Austrian school economists. RothbardMurray N. Rothbard, Man, Economy and State with Power and Market, pp. 967–69. argued that only the free market can ensure an efficient allocation of factors of production whereas government sponsored investment is “either malinvestment or not investment at all, but simply waste assets.” MisesLudwig von Mises, Human Action, pp. 274–79. explained how restricting market competition shifts production to places with less favorable conditions, resulting in lower labor productivity and standards of living. Nevertheless, this point still needs to be understood by countries such as South Korea, whose growth model driven by state-led and export-oriented industrialization appears to have reached its limits.
Remarkable Success Story of Growth at First Sight Korea grew from one of the poorest economies in the 1960s into an advanced economy while avoiding the middle-income trap. Its GDP per capita in PPP (purchasing power parity) almost reached the OECD (Organisation for Economic Co-operation and Development) average in 2018 after having been less than one-sixth in 1970 (Graph 1). Rapid growth rates of between 7 and 10 percent for several decades until the mid-1990s were propelled by very high investment which peaked at 40 percent of GDP in 1990 and has averaged around 32 percent of GDP since then (Graph 2).
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Rapid industrialization and deep integration in the global value chains helped Korea become the world’s fifth-largest exporter of manufactured goods in 2017. It is most striking that behind this seeming outstanding success lies an active industrial policy. Government support for large business groups, known as chaebols, via subsidies and trade and investment barriers turned the likes of Samsung, Hyundai, LG, Kia, and Daewoo (now defunct) into global champions. But as Ryan McMaken points out, there are a lot of “unseen” missed economic opportunities behind Korea’s government-corporate “cooperation,” which means that centralized decision-making and government favoritism to big businesses obviously come at a price.
Growth Slumping While Productivity and Consumption Lag Behind Growth typically decelerates when countries grow richer. Yet Korea’s decline in real GDP growth has been very abrupt—from about 7–8 percent in the 1980s and 1990s to below 3 percent currently. Its potential output has also slumped, driven by slowing capital accumulation and total factor productivity despite the very high investment rates. Most importantly, labor productivity has lagged significantly behind the rapid GDP growth. In 2018 Korea’s real GDP per capita was one-third lower than that of the top half of OECD countries, while labor productivity was 46 percent below that of the same sample (Graph 3). The difference is compensated by longer working hours—Koreans work 15 percent more than the OECD average and 30 percent more than the EU average.
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In exchange for the long working hours, Koreans must content themselves with lower wages and private consumption levels relative to GDP performance. From 1990–2018, the Korean GDP per capita in PPP more than doubled from 43 to 94 percent of the OECD average, while the average wage in purchasing power parity grew much slower, from 59 to 85 percent of the OECD average. This is consistent with the weaker labor productivity growth, but also reflects the monopsonic power of chaebols, very rigid labor market conditions, and an inefficient wage model favoring length of service over performance, which keeps wages depressed in exchange for job security. At 53 percent of GDP, the share of labor compensation is among the lowest in the OECD group. Similarly, households’ net disposable income has steadily dropped, reaching around 50 percent of GDP in 2018 compared to US and euro area levels of about 75 and 60 percent of GDP.
In addition to compressed wages, high import tariffs and limited competition among domestic companies has hurt private consumption, which fell to a quite low 48 percent of GDP in 2018 (Graph 4). As household incomes lagged behind GDP growth, consumption and housing purchases were increasingly supported by credit. Household debt peaked at about 92 percent of GDP in 2019, one of the highest among developed economies.
Revealing an Inefficient Resource Allocation According to the mainstream growth recipe, Korea should be a top-class student with its very high investment ratio, extremely long working hours, and first-rate R&D (research and development) spending (4.6 percent of GDP in 2017). It has obviously excelled in the quantitative utilization of both capital and labor. But the sheer size of resource utilization is not enough to deliver sustainable growth without their efficient combination. Only free markets can ensure an efficient allocation of factors of production to their most productive uses. Unfortunately, in Korea’s case, labor and product markets are heavily regulated and cannot perform their resource optimization task.
Restricted competition on product markets and the government picking winners have always been intrinsic features of Korea’s growth model. The protectionist toolbox has comprised both trade and investment barriers and subsidies. In contrast to its excellent overall ranking in the 2019 Global Competitiveness Index (thirteenth out of 141 countries), Korea ranked only the ninety-first in terms of trade openness for tariffs and seventy-seventh for nontariff barriers. Similarly, its stock of inward foreign direct investment (FDI) was a meager 14 percent of GDP in 2018, compared to 55 percent of GDP for the EU and 36 percent of GDP for the US. With an outward FDI stock of about 22 percent of GDP, Korea has been a net exporter of direct investment. On-budget subsidies for economic activities are almost double the OECD average.
When the chaebol system overstretched and its inefficiencies became too obvious, especially after the 1997 financial crisis, the government pushed for its downsizing and leveling the playing field versus small to medium-sized enterprises (SMEs). As vested interests made market liberalization almost impossible, government support was instead gradually extended to SMEs via credit and other financial subsidies, lower taxation, preferential access to public procurement, and exclusive rights to operate in certain business lines. As a result, both chaebols and SMEs are now operating in segmented and rigorously protected markets while Korea’s product market regulations remain the fourth strictest among the OECD nations.
Labor market regulations are very rigid too, which led to an inefficient dual labor market over time. Korea only ranked close to one hundredth in the 2019 Global Competitiveness Index in terms of labor market flexibility, redundancy costs, and ease of hiring and firing. The labor market is strongly segmented, with a large share of irregular jobs to make up for the tight regulations. Nonregular workers represent about one-third of total employment compared to 11 percent in OECD economies, and earn only 66 percent of regular workers’ wages on average. Well-paid regular jobs in large companies are scarce relative to unattractive jobs in SMEs and services, which suffer from labor shortages. Together with educational mismatches this contributes to a fairly low youth employment rate.
Shift in Growth Strategy Goes in the Wrong Direction As often is the case with government action, Korea tried to address the symptoms rather than the root causes of its problems of inefficient growth and depressed consumption. In 2017, the newly elected president Moon Jae-in announced a shift towards domestic income–led growth, primarily by redistributing incomes and boosting consumption. The government increased substantially the minimum wage by a cumulated 30 percent during 2018–19, reduced statutory working hours from 68 to 52 hours per week, and promised an increase in public employment of about 40 percent.
It goes without saying that these measures made things worse, especially as they overlapped with a significant decline in external demand following the US-China trade war. Employment growth decelerated notably, driven by job losses in manufacturing and SMEs, and new jobs were created primarily in the public sector and more precarious part-time positions. Despite income redistribution measures, private consumption growth decelerated further in 2019 while private investment declined for six quarters in a row, weakened by FDI outflows and company relocations. All in all, Korea’s real GDP growth declined from 3.2 percent in 2017 to an estimated 2 percent in 2019. On top of that, income-boosting measures have been costly: the budget balance is projected to deteriorate from a surplus of 2.6 percent of GDP in 2018 to a deficit of 1.4 percent in 2020.
A Sensible Way Forward What Korea needs to achieve a sustainable revival of its potential growth is an efficient allocation of factors of production by free markets, unencumbered by government protection of either dominant chaebols or SMEs. Only this can ensure genuine capital accumulation and higher labor productivity to underpin market-set wages that do not undermine cost competitiveness. As production is only a means for consumption, freedom to choose the preferred consumption schedules would provide Koreans with a better standard of living and work incentives.
The case of Korea justifies in full Mises’s assertion that government interference with businesses makes people poorer and less satisfied. In Mises’s own words:
government doesn’t have the power to encourage one branch of production except by curtailing other branches….It may subsidize openly or disguise the subsidy in enacting tariffs….What alone counts is the fact that people are forced to forego some satisfactions which they value more highly and are compensated only by satisfactions which they value less (Human Action, p. 737).
Some years ago, there was published a book in the German language with the title L.T.I. These three letters stood for three Latin words, lingua Tertii Imperii, the language of the Third Reich. And the author, a former professor of Romance languages at one of the German universities, described in this book his adventures during the Nazi regime. And his thesis was that all people, without any exception, in Germany of course, were Nazis—not because they had accepted openly and consciously the doctrines of Nazism, but because they had, without a wrong cooperation necessarily, accepted the language, the terminology in which these doctrines were expressed.
And of course one knows very well that these Nazi doctrines had a very long history from Hegel to Heidegger and from Friedrich List to Sombart, and as these people—the victims of the Nazis included—used the terminology, they practically accepted the fundamental thesis of Nazism.
This is a very pertinent remark, because what makes the power of the accepted doctrine is that its terminology is used and spoken also by those people who sincerely believe that they are not affected by these ideas.
And I had the impression, unfortunately, in listening to the discussions of this meeting, that we too have not completely freed ourselves from the impact of the terminology and the language, let us say, of the American Economic Association, of the Committee for Economic Development, of the newspapers who are in favor of a little bit of credit expansion, of a little bit of inflation, and so on.
And it is precisely this, that we accepted—most of the speakers, or many speakers, there are very remarkable exceptions—accepted this terminology, that we left yesterday this meeting, at least the morning meeting, with the impression that there was great sympathy, in this meeting, for a little bit inflation—of course not for the hyperinflation of Germany in 1923, but for something else, for an inflation which is a little bit more civilized.
Now, in what did the difference between the hyperinflation in Germany and the little inflation consist?
The hyperinflation in Germany (one shouldn’t always talk only about the hyperinflation in Germany, if one uses this term; one should also mention that the same thing occurred in this country with the Continental currency in 1781 and fifteen years later in France with the mandats territoriaux), the reason why in Germany the inflation became a hyperinflation was that within the borders of the German Reich, between 1914 and 1923, [there] was nobody, but nobody, in order to use the terminology of Gimbels [department store, laughter], who did realize that there is a connection between the quantity of money, the quantity of printed banknotes, and the rise in prices and foreign exchange rates. Nobody!
It was in the winter of 1918–19 [that] the deputy governor of the German Reichbank attended in Vienna a number of official meetings in which I participated too, and when I mentioned this fact, that the quantity of mark and other monies is decisive in bringing prices up and all these other consequences, he said: “But nobody mentioned this before. You are quite alone with this very absurd idea.”
And this was the fact. You can prove it with the German literature of these years. It’s accessible to everybody. You can discover it. There had all kinds of explanations, but not the true explanation.
And in what concerns these other breakdowns of hyperinflation, the Continental currency in this country and in France, one must say [that] at that time economic doctrine was not yet very well developed, and there was at least a personal excuse; if you admit excuse[s] for bad policies. I myself believe that there is never any excuse for bad policies.
Now, the difference between the hyperinflation in Germany and the inflation in these countries consisted in the fact that there are opponents in these countries. If in the ‘30s such people as Benjamin Anderson had not every day and week opposed the policy of the government, the United States would have had in the ‘30s hyperinflation in the same way in which Germany had it in 1923.
And that if we have today only a little bit [of] inflation, an inflation which is not bad, as people say, which is, after all, even good from some various points of views, this is due to the fact, for instance, that my distinguished friend Mr. Henry Hazlitt publishes every week an article in which he points out that there are great dangers in increasing the quantity of money and expanding credit and that there are other economists in this country who write the same thing and so on.
The difference is not something immaterial, something tangible, something which one may qualify as some mysterious historical accident. The difference is public opinion. And the public opinion in this country is very much in favor of hyperinflation, and especially in connection with the problem which we are discussing today—with the problem of labor, with the problem of unemployment, and so on. And the only reason that these people who are in favor of such tremendous inflation didn’t succeed up to now (nobody knows what will happen tomorrow…) is that there is still an opposition.
And of course you have to come to the paradox conclusion that what makes inflation possible is precisely the fact that there are real anti-inflationists. I don’t mean th[ese] anti-inflationists [who] say an inflation of one percent, 2 percent, 3 percent, and 4 percent is not so bad. There are very serious struggles within the American Economic Association and within the American universities of people with differences of opinions. There are people who are in favor of 2 percent, who are in favor of 3 percent. It’s a tremendous difference, and if people say that there is a conformity among these people they say, “How can you say this? I am in favor of two and a half percent a year and my distinguished colleague is in favor of two and three-quarter percent every year.”
Now we have the consequence of this state of affairs, or, let us say, the reason of this state of affairs is that they are theoretically completely misled, and that their theoretical ideas and the terms in which they express them are inadequate. There is, for instance, the term “level of prices” and the term “prices” (it is obvious that in the term “prices” there are also included wages). Now if it were true that this metaphorical term of “level” is correct, then we would not—as yesterday Professor [Eugênio] Gudin pointed out—we would not in the least be interested in the problems of changes in the purchasing power of money. All prices and all wage rates would move to the same extent upwards or downwards, and people would of course have to pay higher prices, but on the other [hand] they would have higher incomes, and the core problem w[ould] turn into a problem for bookkeepers and accountants, would not have any real value.
The thing which we are discussing today is precisely the fact that there is a discrepancy in these movements—that the prices of the various goods and services do not change at the same time and not to the same extent, and that therefore there are certain groups that are favored and certain groups that are discriminated against. I couldn’t understand how we could yesterday discuss this with this term “level of prices” and with this “what prices move.” Prices, prices…what is “prices”? There are different prices of different commodities. I couldn’t understand how people could discuss this on the second day of the meeting, when, at the same meeting, on the third day and on the fourth day, problems are to be discussed that only exist because there is such a discrepancy as I pointed out.
What is the whole problem of parity prices for agriculture which we will discuss tomorrow? The whole problem consists in the fact that the farmers maintain—whether they are right or wrong is another story—that the upward movement in the prices of commodities was not the same with regard to agricultural commodities than with regard to the products of industry. And what would we be discussing today if the wage rates were always moving in the same way, to the same extent, at the same time in which all other prices of things are moving? The problem is simply this: are or are not prices and wages determined on the market by the interplay of demand and supply? Or can they freely be manipulated?
Police officers tend to the assumption that if the police says that, from tomorrow on, the price of milk will be only 50 percent of what it is today, the whole problem is solved and milk will tomorrow be available at a much lower price than it was today, without any further consequences. The same people tend to the idea that the government is in a position to decree minimum wage rates and that these minimum wage rates will necessarily raise the wages paid to all people and that no further consequences will result. And the unions, of course—which have now assumed part of the duties of the government, insofar as they tax the people and as they resort to violence—the unions believe that their fiat, that their order brings wages up without bringing about any consequences, without resulting in unemployment. Most people, in this country and in all other countries, consider it as something really absurd when one tells them that unemployment—permanent, mass unemployment, prolonged year after year—is the consequence of wage rates fixed above the height which the unhampered market would have determined. Remember, for instance, what happened in Britain in the ‘20s, when people spoke about unemployment as an act of God—nobody knows how it happened and the government has to do something about it, and so on—without asking the question why did not mass unemployment develop when the horse breeder and the coach man were put out of work by the railroads, why there was no unemployment to such a great extent in the ages when there was no unemployment dole, and so on…
[End of tape 7; beginning of tape 8]
To fix wage rates at a higher height than that which the unhampered market would have developed without bringing about unemployment of a part of the potential labor force, this is the decisive problem, that what the public sees and what unfortunately also many discussions of people who should know it better show is that people believe in a quite different doctrine. They believe that there is a cake available, and that it is [in] the power of the management to give from this cake as little as possible, almost nothing, to the workers, and that the workers unionized, resorting to violence, or the government by ordering, decreeing a minimum wage rate, are in a position to give a greater part of this cake to the workers.
We have here today wr[itten] about the excellent ideas and very useful suggestions of my distinguished colleague Professor Petro, but the decisive problem, whether people will accept these proposals or not, is whether they will preserve what is called the free rider argument.
People say the unions in fighting against the employers are raising wage rates for all workers. If a man is not a union member, does not pay union dues, does not contribute to all those expenses which union leaders consider necessary for the unions, then he enjoys advantages for the production of which he did not pay—the free rider argument.
As long as the free rider argument is not destroyed in the prestige that it enjoys in public opinion, as long we will have the union shop or the closed shop, because this argument is rather convincing, it is an argument that cannot be refuted otherwise than if you want to have a short slogan to refute it—otherwise than by saying business is producing jobs and unions are producing unemployment. As long as people do not realize that this is the essence of the problem, it is absolutely useless to talk about the reform of the unions. It’s the question whether the picket line should have six men or eight men or if a man is beaten by the pickets whether this is a real offense or whether he is guilty or having insulted them or something else…
The decisive problem is this: is it possible that by an intervention from the outside – that means not from the market forces, not from people buying and selling on markets—by the police power or the power of the picket lines, is it possible to raise wage rates for all those anxious to get jobs and to earn wage rates?
I remember still that when in the ‘20s such ideas were mentioned people always told me “This is absurd what you are saying.” I remember what a sensation it was when one day at the end of the ‘20s or at the beginning of the ‘30s Monsieur Rueff published an article in which he pointed out that there is some connection, even a very close connection, between unemployment doles and the height of wage rates, and the great problem of unemployment in England. He dealt specially with the English example, because there were some reasons which made it possible for him to study precisely the English problem. But this is not a national problem, and this is not a problem of some industries. It is the fundamental problem of interventionism. The same problem which we have to discuss in all subjects which we are dealing with. This problem is a problem of economics, and if we accept the language, the terminology of these other people, we will never be able to master these problems.
The thing is [that it is] not only necessary to deal with details and raise, for instance, the question whether the American legislation concerning unions should be changed in this or in that regard. It is [that] as long as practically the whole political nation believes that the unions are very beneficial for the immense majority of the people, for the workers—that the unions are the only institution that prevents the millionaires from getting everything which by right belongs to the workers—we will have this situation. It is therefore, in my opinion, not correct to say that the fault lies with constitutional provisions, with democracy, or with all other things. Not democracy is responsible, but the fact that public opinion is convinced that all the blessings come from the unions and all the evils in the world come from management.
And unfortunately, these people who form management too believe in the same ideas.
In the same way in which this Professor Klemperer, whose book I mentioned before, pointed out that even the Jews in the concentration camp, speaking the language of the Third Reich, adopted virtually all the ideas of the Third Reich, we see that the businessmen have adopted this language.
There is for instance this talk about productivity, a rise in productivity. What they mean is an increase in the monetary value of the output per hour of work, but this increase, which the unions claim completely for themselves, is not due to the fact [that] the workers have improved productivity; it is due to the fact that better machines and better tools have been employed by the capitalists and by the entrepreneurs.
The marginal, the individual productivity of labor is much greater in this country than it is in any other country of the world. Certainly we all are convinced that the American worker is not only the best worker but the best specimen produced in world history. There is no doubt about that. [Laughs]
But nevertheless, if we admit even this, that there was never such a thing in history as the American worker, we must ask the question whether this refers to all American workers, whether a man who comes from the outside to the United States does not get the same wage rate and an American who would emigrate to India, let us say, wouldn’t be forced to accept in India the level of wages which are paid in India.
If one raises the question what makes the difference between the American standard living or, as it is popularly called, the American way of living and the foreign countries’, then we have to admit that it is the amount of capital invested per head of the worker. Therefore it is fantastic to say, as is always said, that the wages have to go up because the productivity of labor went up.
And instead of pointing out this fact, in most of the wage negotiations the representatives of the employers try to point out [that] wages went already up, [that] they went up even more than productivity, and so on. That there is no relation between the wage rates, or let us say, the marginal utility of labor, and the productivity of labor measured according to this system is never mentioned—that wage rates which are exceeding the marginal utility of labor necessarily bring about always unemployment.
And as long as we do not accept this idea, as long as we do not know this, we will not have any sound labor relations. As long as we do not accept this, we will not have a stable currency or a sound currency, because then, as soon as unemployment develops—even before it develops, even if it’s only threatening—then credit expansion sets in, the famous full employment policy of Lord Keynes. And in mentioning this name I want to close my remarks, because the truth is that Lord Keynes didn’t invent these things. On the contrary, he wrote them into a book only when they were already long popular, but they will probably be connected in history even more than with the name of Karl Marx, who was after all convinced that labor unions can NOT improve the standard of living of the workers.
More than with the name of Karl Marx, and more than with the name of Samuel Gompers, they will be connected with the name of Lord Keynes.
Thank you.
[Applause]
Transcribed by Pedro Almeida Jorge of Instituto Mises Portugal. Original audio can be found here.
Listen to the Audio Mises Wire version of this article. Landlords have come under particular scrutiny in the last few months, especially with the coronavirus-induced shutdown of the economy. Fannie Mae, Freddie Mac, and HUD suspended all evictions on their properties and several municipalities have done the same. Petitions for a rent strike have also been floated amongst several advocacy groups.
These measures mostly have to do with the coronavirus and government’s power grab during it, but a more general hostility still exists. The puzzling popularity of Marxism, even if muted by its continuous failures, is also still around. And the Marxist left has certainly gotten more vocal about its disdain for landlords recently. One group called People’s Action has called for a “National Homes Guarantee” that would “decommodify” real estate by “taxing the appreciation of privately owned homes.” An even more radical group, Landlord Euthanization, even has Mao Zedong (the man responsible for more deaths than any other person in world history) as its avatar. To sum up these sentiments, we can quote the utterly mundane, yet popular Twitter user Existential Comics,
Landlords do not “provide” housing. Construction workers provide housing. Landlords, in fact, do the opposite of providing housing. They take the houses that were built for people to live in, hold them hostage for rent, and evict anyone who can't pay.
While this has a (small) ring of superficial truth to it, if you dig deeper, it becomes rather absurd. After all, construction workers are paid a salary. Does Existential Comics want these construction workers to be paid a salary by the developer and then own the property as well? Or does he want the construction workers to forgo their salaries and simply take ownership of whatever percentage of the property they contributed to afterward?
How many construction workers would even accept such an arrangement?
And if some did, would they be allowed to charge rent to a tenant after the property has been built or is that still theft?
Profits and the “Labor Theory of Value” Right off the bat, many seem to have a grossly inflated view of how much landlords actually make on their investments. They forget or downplay how much property taxes, insurance, maintenance, landscaping, common area utilities, and the like cost. And that’s before the mortgage, which most properties have.
According to CBRE, in 2019 the cap rate for infill multifamily properties was 5.11 and 5.37 for suburban multifamilies. A cap rate is the percent return that a property would make with no debt, so a 5.11 percent and 5.37 percent return, respectively. Although that beats inflation, it’s nothing to write home about.
As far as residential home developers go, the average profit margin in 2019 was 7.6 percent. This would amount to an 8.3 percent raise for each construction worker if they were given the entirety of the profit. How many would want to wait until a house was entirely built and sold (often over a year) before receiving their wages in a lump sum, even if it was 8.3 percent more?
And this really comes to the crux of the matter. Anti-landlord radicals and Marxists are relying on the thoroughly refuted labor theory of value. As Existential Comics makes perfectly clear,
Rent is theft. Profit is theft. Interest is theft. Look, it isn't complicated. If you are making money that didn't come from your own labor, then it is coming from someone else's labor. You are stealing their money.
Perhaps some of this mindset comes from the term “landlord” itself, which is an antiquated term from the Middle Ages. Regardless, the assertion that “rent is theft” is, of course, false. The labor theory of value itself is rather absurd. Marx required that only “socially necessary abstract labor” be embodied in a commodity, but this is just window dressing. Wouldn’t the social necessity of something be on a continuum from useless to extremely useful? Why would there be a hard break between “socially necessary” and “socially unnecessary”?
Spending ten hours piling up dirt could be considered not “socially necessary” and thereby of no value. But the whole concept breaks down when comparing something of little value to something of much value. For example, spending ten hours putting together a box would be considered “socially necessary,” and by this theory the box would embody ten hours of labor. But would that box be worth twice as much a computer that took only five hours to build? By what possible means do we address how “socially necessary” different types of labor are and how valuable they should be considered? And if they are valued differently, shouldn’t the person whose labor is valued higher earn a higher wage? And regardless of their income, shouldn’t they be allowed to invest any money that they don’t need or want to use on consumption immediately?
Quite obviously, the amount of labor put into a product is irrelevant to its value. No one thinks this way when mulling over a purchase, because it’s superfluous to their decision. The value of a product is its subjective value to the end buyer on the open market.
What Landlords Provide Returning to property owners, we can look at the landlord and see that he or she offers three things:
Managerial oversightRisk mitigationTime preference Managerial oversight includes everything from hiring maintenance technicians and leasing agents, to coordinating financing and capital improvements, to formulating policies, procedures, and so on. Of course, not all landlords do this. Many exchange money for time and outsource this responsibility to a property management company.
Even still, the capitalist offers the latter two list items. Although it is unfortunate to lose one’s job, a construction worker doesn’t bear the risk of a project going under. At worst, the worker simply stops making a wage. A real estate investment—be it a new development or the acquisition of an existing building—can and often does lose money. Although the average profit on a new development is 7.6 percent and the average return on a multifamily infill property with no loan is 5.2 percent per year, some profits are higher and some are lower. And some, of course, are negative. How many construction workers would take 8.3 percent more on average knowing that it could be substantially less or even negative?
There’s something in stock investing called a “beta,” which measures an individual stock’s volatility. The higher its volatility, the lower its price. Given that there is risk in an investment such as real estate, including the risk of it losing money (as we saw en masse in 2008), having a guaranteed salary is often a better bet. Same goes for a tenant whose rent is not contingent on their lease’s terms as set by the market, but on the volatile performance of the property they live in. Such an arrangement doesn’t require Marxist twitter users. It’s actually rather mundane, and is referred to as a housing cooperative, in which individuals buy membership in the cooperative instead of a unit (as in condos) or the building itself.
The final point is time preference, which was alluded to above. This was the nail that Eugen von Böhm-Bawerk put in the coffin of the Marxist theory of labor exploitation. As G.P. Manish explains,
Once you accept the subjective theory of value, you actually realize the laborer is getting the value of everything he puts in because of the time difference between the value of the labor and the output he creates that is going to be sold in the future….The reason the worker accepts this arrangement is because he does not have the means to sustain himself through this production process. That’s what the capitalist does. He bears the burden of uncertainty…and has the means to provide wages to the worker while the production process is underway.
This example plays perfectly with the construction workers, who would rather receive 91.7 percent of the value of the home in wages than wait for the property to be sold or rented and risk any volatility in price. It also applies to renters who either have yet to acquire the savings to purchase a property or would prefer not to use their savings to do so. In fact, many tenants will eventually become landlords after they’ve saved up enough to purchase investment properties. just as many landlords were once tenants. Indeed, at least for residential properties, rental properties are still a heavily middle-class investment: in 2015 74.4 percent of rental properties were owned by individual investors and not corporations.
Conclusion If an individual makes more income than they need, should we really demand that they consume it all? Obviously, they should be allowed to invest their savings in long-term projects. In this way, a property owner could just as well have put their money in the stock market or in bonds as into real estate. To eliminate the landlord from an economy is effectively to completely socialize it and go fully communist. The barbarism and totalitarianism of previous communist regimes is almost certain to come with such a decision.
There are plenty of bad landlords out there to be sure. But then again, there are plenty of bad tenants, including “professional tenants” who try to game the system or those who simply do major damage to their units. That being said, most landlords and most tenants are decent people. The “bad ones” are usually just those who fall on hard times and have a difficult time paying rent or affording necessary repairs.
And let’s not pretend like the government has a good track record in this department as disastrous housing projects such as Pruitt-Igoe and Cabrini-Green have clearly shown.
Every industry has good and bad actors, and property ownership is no different. It’s an important segment of the economy that, if overly restricted by the government, will push needed capital away from construction, renovations, and the like. Real estate development provides managerial oversight, risk mitigation, and fulfills the higher time preferences of construction workers while landlording does the same for tenants.
Listen to the Audio Mises Wire version of this article. The latest report on new unemployment claims was abysmal, coming in at 4.4 million last week, some 100,000 more than surveyed economists had expected. The continuous claims came in at just under 16 million, an all-time record. Mainstream labor economists estimate that, all things considered, the actual unemployment rate now (which is only officially reported with a lag) is above 20 percent—a rate not seen since the darkest days of the Great Depression. Indeed, all of the job gains since the Great Recession have been wiped out in just a matter of weeks.
What’s worse, even though the official unemployment rate is probably not quite as high as it was in 1933 (when it averaged 24.9 percent), there are reasons to believe that our labor market is currently in even worse shape economically than it was at the lowest depths of the Great Depression. Furthermore, once we take into account insights from Austrian capital theory, we can see why Keynesian hopes for a rapid recovery—and calls for longer lockdowns due to health concerns—are misguided.
Why the Current Unemployment Is Worse Than the Great Depression In the first place, there is a technical reason that the government’s official unemployment figures for 1933 are misleading: at that time, people who held “make work” jobs funded by government relief efforts were counted as unemployed. (In my opinion, this was the correct judgment.) If instead we use adjusted figures (according to Darby 1976) then annual unemployment during the Depression peaked at 22.5% in 1932. In other words, if we count unemployment in the 1930s the way we count it today, then arguably the “official” rate is already the worst in US history, period.
However, besides this technical issue, there is a much more fundamental difference between unemployment in the early 1930s and today: back then, the people out of work had been laid off. Yet today, the people out of work are in lockdown.
This is an enormous distinction. When the economy crashed following the stock market in 1929, consumers restricted their spending according to their preferences as to what was most expendable. Some businesses went under completely—and these were the businesses that were the least important, according to their customers.
At the same time, plenty of other businesses remained afloat, but they cut back their workforces. Again, businesses laid off the most expendable workers, as judged by the managers/owners.
Intuitively, during the Great Depression and any other standard recession, for that matter, the economic system sheds those jobs that are the least important, in order to gradually reallocate workers into niches that are more appropriate. The deeper the malinvestments have been during the boom phase, the more workers will find themselves in unsustainable outlets when the crash occurs. But given the fact that X percent of the jobs need to disappear, the market economy during a normal downturn sheds them in the most economical areas, causing as little disruption to the flow of goods and services as judged by the consumers.
In complete contrast, today the principal criteria for which 20+ percent of current workers have lost their jobs are (1) they don’t work in an occupation that can be done from home and (2) they aren’t deemed “essential” by government officials. Naturally, these criteria don’t come close to approximating what is the most economical way to shed jobs, from the perspective of consumers.
An Analogy with the Household Budget In the previous section, I argued that our current labor market disruption was much more economically significant than what was seen even during the depths of the Great Depression. Let me use an analogy to drive home the point.
Suppose your household were forced to restrict its spending by 25 percent. (Indeed, this might not be a mere hypothetical for many unfortunate readers right now.) However, there are two options for achieving this outcome. Under Option #1, the adults in the household get to decide where they will cut their spending, subject to the requirement that they reduce the total by 25 percent.
Under Option #2, an outside government official—in consultation with various experts—forces the household not only to cut spending by 25 percent, but also specifies where the spending cuts will occur.
Which option would be more burdensome? The answer is clearly #2.
Likewise, given that the economy has to endure an unemployment rate above 20 percent, it’s far preferable if consumers and business owners get to effectively pick (through voluntary market actions) which workers are laid off. It is far more devastating to endure our current situation, in which the workers who have lost their jobs have been selected by technological facts (i.e., whether a job can be done remotely) or through the political process.
Keynesians Ignore Capital Structure Besides the important distinction between layoffs and lockdowns, there is another reason that Keynesian economists are underestimating the devastation wrought by the current policies: Keynesians typically don’t have a long-term “capital structure” in their models the way Austrians do.
For example, consider this tweet from Larry Summers:
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The problem here is that Summers is viewing things through the lens of aggregate demand: following a financial crisis, consumers and businesses try to pay down debt, and this means that only government pump-priming can boost total spending up to full employment levels (especially if we’re in a liquidity trap).
But since that’s not the issue here, Summers thinks that once the lockdown ends all of the “pent up” consumer demand will return and things should go back to normal. Why, it will be just like people going back to work on a Monday.
Yet what Summers is leaving out is that there’s more to the economy than labor going into a production function in order to spit out goods for purchase. Each of us at our respective jobs uses all sorts of intermediate goods produced by other people in the distant or recent past.
The weekend, or tourist season at Cape Cod, is a very predictable event, and we have enough inventories (in food, refined gasoline, etc.) to carry us over the hump. Likewise, if a certain area of the country gets hit with fires, an earthquake, or a tornado, such that workers in that region can’t get to their jobs even for weeks at a time, it’s manageable because the rest of the economy can pick up the slack.
But in our current lockdown the entire country has been forcibly prevented from doing business as usual. The longer this process continues, the more our integrated, complex capital structure is going to break down. It does no good for the carpenters to go back to work if there are no new nails available for them to use.
Most states are currently poised to begin a phased return to work within the next week or two, so hopefully we can get ahead of the breakdown before it becomes too bad. But those economists arguing that we should extend the lockdown for many more months, and that we can use government “relief spending” to carry us over the hump, are being quite blind to the dangers in such a policy.
Health vs. GDP As a final note, let me mention that in our household we are being extremely cautious about the coronavirus because of my wife’s medical history. I am not elevating concerns of GDP over health.
In fact, from a purely self-centered standpoint I want low-risk people to leave their homes so that they can get the virus and (hopefully) only suffer mild symptoms, so that its overall prevalence in the community quickly fades away. This will make it safer for members of my household, if and when we carefully venture out into the world after this initial period of isolation.
Listen to the Audio Mises Wire version of this article. It has been a long time since I read anything by Paul Krugman, and seeing his most recent column simply reminds me why I’ve not missed anything. As both an extreme Keynesian and political partisan, he long ago abandoned economic analysis for something economists should recognize as nothing less than what Mises called metaphysics.
Nonetheless, my curiosity got the best of me when he wrote that reopening the economy and allowing people to go to work almost surely will cause a depression. He writes:
Last week the Bureau of Labor Statistics officially validated what we already knew: Just a few months into the Covid-19 crisis, America already has a Great Depression level of unemployment. But that’s not the same thing as saying that we’re in a depression. We won’t know whether that’s true until we see whether extremely high unemployment lasts for a long time, say a year or more.
Unfortunately, the Trump administration and its allies are doing all they can to make a full-scale depression more likely.
Now, many of us believe that the massive monetary and “fiscal” interventions into the US economy from both federal and state governments are likely to create a depression and make the current rates of unemployment grow even more. That, however, is not Krugman’s point. In fact, Krugman seems to believe that there isn’t enough government intervention, which is a regular theme in his writings. Instead, Krugman is alleging that reopening the economy is what will usher in the next depression.
We have been there before. Who can forget Krugman’s 2011 clarion call to form real defenses against an imaginary invasion by space aliens in order to revitalize the economy? Anyone who has read (or taught) Keynesian economics knows that according to Keynesians, the economy always is a slip away from going into massive unemployment unless government (a) cuts interest rates until they cannot be cut anymore, and (b) engages in massive new spending to increase “aggregate demand” because “full employment” only can be reached when government intervenes, period.
But even I will admit that this column took me by surprise, although he has his usual partisan snipes. To the question of how we avoid an out-and-out depression, Krugman replies that we need to “stay the course” (in his words) and keep everyone locked up even longer. His reasoning is that if Americans are let out of home confinement now, all of the so-called gains that this country supposedly has made against the ravages of COVID-19 will be lost and then the rock will roll back down to the bottom of the hill. Krugman writes:
If we could get the coronavirus under control, recovery could indeed be very rapid. True, recovery from the 2008 financial crisis took a long time, but this had a lot to do with problems that had accumulated during the housing bubble, notably an unprecedented level of household debt. There don’t seem to be comparable problems now.
But getting the virus under control doesn’t mean “flattening the curve,” which, by the way, we did—we managed to slow the spread of Covid-19 enough that our hospitals weren’t overwhelmed. It means crushing the curve: getting the number of infected Americans way down, then maintaining a high level of testing to quickly spot new cases, combined with contact tracing so that we can quarantine those who may have been exposed.
To get to that point, however, we would need, first, to maintain a rigorous regime of social distancing for however long it takes to reduce new infections to a low level. And then we would have to protect all Americans with the kind of testing and tracing that is already available to people who work directly for Donald Trump, but almost nobody else.
The closest thing to this kind of thinking is AP correspondent Peter Arnett’s infamous quote after American air strikes decimated the village of Ben Tre: “It became necessary to destroy the town to save it.” In modern parlance, it means that in order to “save” the US economy, the government must enact and enforce policies that will severely hamper economic activity. However, Krugman, being Krugman, believes that there is an easy interim “solution” to enabling the economy to work just fine—without working, of course. He writes:
At the same time, the administration and its allies are apparently dead set against providing the financial aid that would let us sustain social distancing without extreme financial hardship. Extend enhanced unemployment benefits, which will expire July 31? “Over our dead bodies,” says Senator Lindsey Graham. Aid to state and local governments, which have already laid off a million workers? That, says, Mitch McConnell, would be a “blue-state bailout.” (Emphasis mine)
This statement truly exposes the extreme Keynesian mentality: printing money is the near-direct equivalent of actually producing something. Like all Keynesians, Krugman commits the fallacy of composition, believing that what might be good for one person (or a few persons) thus is good for everyone.
For example, we already have seen that thanks to current government policies, many workers are receiving unemployment benefits that are more than the wages they would receive if they returned to work, so, not surprisingly, they are staying off the job. According to the Keynesian-supporting journalists at CNBC, that is a “good thing.”
No, that is a disaster in the making. Although it might be good for me if the government gave me a million dollars a week not to work, it would be effective only if I’m the only one receiving the benefit. Although the rest of society actually would be worse off under such a policy—since it would be nothing but a naked wealth transfer from everyone else to me—I could claim that it really is a “good thing,” because, in Keynesian-speak, it would increase “aggregate demand.”
Think of this on a very large scale, and one has an idea of what Krugman is advocating in the name of preventing a depression. Although it is clear that the Trump administration has engaged in one policy disaster after another by flooding the economy with new money in hopes (vain hopes) that it can “replace” the permanent economic losses due to mandatory business shutdowns, one senses that Krugman believes that these so-called stimulus packages are not enough. Indeed, one can interpret his attack on Trump and Senate Republicans as saying that they are refusing to go as far as Krugman apparently wants: to put nearly the entire workforce on the dole.
One is reminded of J.M. Keyne’s quote that credit expansion from thin air “turns stones into bread.” Krugman essentially is saying the same thing; government via massive monetary injections into the economy magically is substituting money for the real thing: production of actual and consumable goods and services. Unfortunately, too many people in authority believe this nonsense and believe it to our demise.
Like so many others on the left, Krugman believes that we are faced with a stark choice: lock down everyone and defeat the coronavirus or allow people to live their lives without government interference and so get sick and die. As Michael Accad recently wrote, this is not about that kind of tradeoff. Given that the original policies which Krugman has endorsed came about because of an outright fraudulent epidemiological model by Neil Ferguson of Imperial College of London, which predicted a whopping 2.2 million American deaths unless government acted immediately to quarantine the whole country, it is just as hard to take Krugman the epidemiologist seriously as it is to take Krugman the economist with anything but a huge block of salt.
To sum up Krugman’s latest outburst, we have the following progression: (a) shutting down businesses across the country has resulted in massive layoffs and depression-level rates of unemployment; (b) letting people go back to work will result in even greater levels of illness than before, which will really spur unemployment; (c) therefore, print lots of money and keep people inside and everything will be fine.
The logical fallacies here are overwhelming. If governments continue to keep businesses shuttered and people locked up, unemployment rates soon will skyrocket to unprecedented levels and we will be in an even worse depression. However, Krugman adds that if governments vastly expand credit that is now beyond already unrecognizable levels, then the glorified money printing will keep everything in check.
This is logic worthy of not just Keynes, but of cranks like Silvio Gesell and the gaggle of modern monetary theory (MMT) advocates. To be honest, the only thing missing from Krugman’s latest fantasy is the beginning line, “Once upon a time….”
Recently a spate of prominent British companies apologized for their past involvement in slavery. Some have even declared intent to pay reparations. As private organizations these entities have the right to make their own choices on reparations.
Their stated reasoning, however, demands more scrutiny. The British government has not promised reparations to former colonies, but based on the astounding growth of the “church of wokeness,” political figures in coming months may be forced to suggest a reparatory agenda for the British West Indies or face cancellation. Conversations about slavery are emotionally taxing but inviting a bit of logic to the debate will not harm us. The argument for reparations rests on three claims: (1) Britain has a moral imperative to correct past injustices by compensating the descendants of slaves. (2) Slavery built Britain’s modern economy, hence reparations represent a just redistribution of wealth to former colonies. (3) Slavery retarded the development of the British West Indies, thus compensation is required.
The Problem of Identifying Victims These sentiments evoke visceral emotions but collapse when scrutinized. The first assertion fundamentally misunderstands the purpose of reparations. Reparations should deliver redress to victims who endured atrocities. We often hear that Jews and Japanese Americans have been compensated for the tragedies they encountered and that therefore reparations for slavery are justified. But this is an inaccurate comparison on several fronts. In these cases the victims themselves, or their direct descendants, were the beneficiaries of reparations. Furthermore, both scenarios reflect acts of barbarism ordered by the state itself. The Holocaust was a genocide instituted by the German state and its agents. The wrongful internment of Japanese Americans was ordered by the US state itself (although the program was more or less declared unconstitutional by the US Supreme Court in recent years. In contrast, those who would presumably receive reparations under current proposals were never themselves enslaved.
An additional problem for West Indies slavery is the fact that many slave owners were not who they are now often presumed to be.
Slavery was so widespread in the West Indies that many owners were nonwhites. In describing the pervasiveness of slavery in Jamaica, R. Montgomery Martin (1854) notes that “the free coloured and black population of Jamaica included the owners of some 70,000 enslaved Africans.” Interestingly, the compensation paid to slave owners for abolition was indiscriminate along racial lines, and as a result, black and mulatto slave owners were duly reimbursed for the assault on their “property rights” brought about by the abolition of slavery.
Britain’s Economy Was Built by Slaves? The second proposition is even more dubious. Quite undeniable is the claim that slavery was a source of capital for British industries. But what critics often forget is that had it not been for its superior institutions and its culture of trust, Britain would not have been able to generate gains from slavery and other enterprises. Even in the preindustrial era, Britain boasted high-quality institutions (i.e., market institutions, extended families, guilds) relative to contemporaneous societies. Some scholars have even posited that the absence of colonies in the Caribbean would have had a minimal effect on the economy. To paraphrase one study, without the trading opportunities offered by North America and the Caribbean, “the Industrial Revolution would still have looked much as it did in practice, since there were ready substitutes for the cotton, sugar, corn, and timber of the New World in Eastern Europe, the Near East, and South Asia.”
Notwithstanding compelling evidence against the case for reparations, activists are still invoking the thesis of Eric Williams, who argued that slavery generated the capital to fuel the British Industrial Revolution. But recent economic analysis rebuts this assumption. After assessing Williams's thesis, economist C. Knick Harley makes the following observation:
If we believe as Williams did that the Atlantic economy made a central contribution to the subsequent Industrial revolution, it seems likely that the route through which this contribution came was the trade to the colonies of the northern mainland….In the absence of slavery, the northern settlements would have found alternative goods to sell into the Atlantic economy and their growth, and their demands for British manufacturers, seem unlikely to have been stifled.
Innovation and productivity explain economic growth, not slavery. Examining British economic growth from 1620–2006 researchers conclude that “innovative activity and population growth were economically significant determinants of per capita growth in Britain during most of the last four centuries.”
Assessing the West Indies’ Economy without Slavery Meanwhile, there is a narrative in proreparation circles attesting that Britain is morally obliged to compensate the descendants of slaves because without slavery West Indians would be richer. Counterfactuals are interesting in historical research, but this one is essentially pointless, since there is an abundance of evidence indicating that these activists' postulates are untrue. Black people residing in Jamaica and Barbados, for example, have higher per capita incomes and literacy rates than their counterparts in Nigeria and Ghana, whose ancestors were never enslaved. Yet this response is not particularly persuasive to activists. They often retort by arguing that if there had been no slave trade in the first place Africa would have been allowed to develop without European interference. They are only partially correct.
Research has shown that in the absence of the slave trade Africa would be richer but still not as developed as Europe. Moreover, the Great Divergence between Africa and Western Europe emerged before the transatlantic slave trade, as economist Marian Tupy aptly describes: "The origins of global inequality, which saw Western Europe…power ahead of the rest of the world, can be traced to the rise of the Northern Italian city-states in the 14th century and the Renaissance in the 15th century. By 1500, a typical European was about twice as rich as a typical African." Studies further indicate that the quality of precolonial institutions also explains regional variations in development in Africa. The pressing issue of underdevelopment in Africa is more complicated than the continent being the victim of the transatlantic slave trade. Likewise, in policy circles it is well established that Jamaica, a leader in the quest for reparations, is plagued by crime, corruption, and low productivity.
It would be more appropriate for British activists and their supporters in the West Indies to direct their energies at solving real problems in the region, because it is obvious that slavery is not the cause of challenges in the contemporary Caribbean.
A belief still commonly held today by not just Marxists and socialists, but progressives of many stripes, is the insistence that employers are “stealing” part of their workers’ labor because the wage workers receive from their employer are less than the contribution of their labor to the final value (i.e., selling price) of the finished good.
Profit to the employer, the argument goes, is akin to theft from the workers. Profit is “surplus value” created by the worker but taken by the capitalist, they say.
This surplus value represents an exploitative “wage theft” of sorts, and, importantly, is an exploitation that would not exist under a socialist economic system, according to their argument.
But in his 1891 book The Positive Theory of Capital, Eugen von Böhm-Bawerk reveals that even a system of state-owned means of production would not eradicate such “surplus value.”
Capital and Interest For sake of clarity, it is critical to understand that what Marxists refer to as “surplus value”—or what is otherwise commonly referred to as “profit”—Böhm-Bawerk identifies as interest.
Interest, as recognized by the Austrian school, is the difference in value between present and future goods. Other things held equal, goods of like wants satisfaction are more highly valued in the present relative to the future. People will place a higher value on, say, receiving a car today relative to a promise to receive the same vehicle five years from now.
Similarly, this time preference explains why people are willing to repay, for instance, $105 back to the bank in one year’s time in exchange for receiving $100 today.
Böhm-Bawerk applies this insight on interest to the capitalist’s “profit” on his investment in productive resources like land, labor, and capital goods.
As he would describe it, the capitalist invests present goods (money) in exchange for future goods (the revenue he receives from the sale of the finished goods). More specifically, the capitalist’s money is invested in the labor, land, and capital goods utilized to create the finished products at some future date.
To better understand why this is important, it may be easier to conceive of the transaction between workers and capitalists like a loan. For instance, the capitalist, via his investment, “lends” a sum of money today to workers in the form of wages. The capitalist, as “lender,” is then paid back at a future date, but not directly from the worker’s wallet. Instead, he’s paid back from the income he receives when selling the finished product resulting from the worker’s labor.
If the income received from the finished products is larger than the money invested in labor, the difference is considered interest, as Böhm-Bawerk describes.
Conversely, the workers are like “borrowers” in a loan situation. They receive money now with a promise to “pay back” the loan in the future, except the repayment is in the form of the future finished products created by their labor.
Marxists and progressives, however, would argue that this interest represents an exploitative surplus value when it comes to the portion of the capitalists’ investment dedicated to labor.
If a worker is paid, say, $20 today for his labor which contributed to $25 of the final sale price of the finished good, that worker was shortchanged by the $5 difference by the capitalist, they’d argue.
To rectify this unjust worker exploitation, the socialists would say, society would need to abolish the private ownership over the means of production. Instead, the state would own the means of production, and in turn the exploitative “surplus value” taken by the capitalists would be eradicated.
Interest under Socialism Böhm-Bawerk’s work, however, systematically demonstrates that so-called surplus value would not be eliminated under socialism—rather it would be shifted from capitalists to the state.
As a starting point, Böhm-Bawerk points out that even under state-owned means of production, present goods and future goods would not be treated as having equal value, because, as he wrote, the “difference in value between present goods and future is an elementary economic phenomenon independent of any human arrangements.” Changing the economic system won’t change that basic fact.
He continues by exploring how the situation would play out under socialism: “The Socialist state, as possessing all means of production, gets all the citizens to work in its factories, and pays them a wage. It conducts, therefore, on the largest scale the buying—forbidden to private individuals—of future good Labour.”
In calling labor a “future good,” Böhm-Bawerk refers to the finished goods that come to completion at a future date resulting from labor, and therefore representing future income to the socialist state paying the wage.
“Now, on technical grounds, various portions of the labour it buys it necessarily sets to work simultaneously towards various productive ends widely removed in point of time,” Böhm-Bawerk continues. “One group of laborers, for instance, it sets to baking; another it sets to sink mining shafts, which, perhaps, assist in turning out consumption goods only twenty years later; another it sets to replant a forest.”
“Now how much can and should the Socialist state pay as wage to those workers whose labour it directs to those far-away but productive ends?” Böhm-Bawerk asks. In other words, would the “interest” on investments in labor be the same for long-term ”loans” to workers as it would for short-term “loans”?
Imagine if the socialist state attempted to eliminate the phenomena of interest in their mission to eliminate exploitative worker “surplus.”
Workers like foresters devoted to more remote finished goods would be greatly advantaged over those devoted to more immediate ends. It would result in foresters being paid the “full value” today for the product of their labor sold a hundred years from now, whereas bakers are receiving full value today for the product of their labor sold in one day’s time.
It would be like the foresters being paid 2120 wages today while bakers have to accept 2020 wages. Clearly, there would be major incentive and rewards for workers to enter lines of work dedicated to products that won’t ripen into finished products until far into the future.
As a result, Böhm-Bawerk wrote, “If the entrance to individual branches of employment were left free to all comers, everybody would be a forester and nobody would bake bread; the country would relapse to primeval forest; and the present, with its pressing needs, would remain unprovided for.”
In order to avoid such a situation, the socialist state would need to utilize the same method of discounting wages as capitalists do.
“But if the foresters are paid exactly like bakers at 4 dollars per day, they are exploited just as they are by the capitalist undertakers under the present system,” Böhm-Bawerk wrote. “In buying the future commodity, labour, an agio is put on present goods, and the labourer, instead of his future product of $100, is put off with a present wage of $4, which represents the present value of the planted saplings. But the surplus value which these saplings take on as they grow into oak trees ready for cutting, the Socialist commonwealth puts into its pocket as real interest.”
But wouldn’t the socialist state, in the ever-present mission for “equality,” make workers whole by redistributing the funds back to them?
“It is, too, well worthy of remark that an equal distribution of the interest obtained by the Socialist state does not establish the same economic conditions as if the interest had not been taken at all,” Böhm-Bawerk answers. “In this distribution it is not the persons whose labour and product the interest was due that get the interest, but entirely different people.”
For instance, the forester whose oak obtains $100 a hundred years in the future but is paid $4 in wages today yields a “surplus” of $96. Say the state evenly divides the interest it collects in the production process by giving all workers an additional $2. The forester is still far from being made whole, according to the Marxist theory of “surplus value.”
“Thus we come to a very remarkable and noteworthy result,” Böhm-Bawerk announces. “Interest, which today the Socialists abuse as a gain got by exploitation, a robbery from the products of labor, would not disappear even in the Socialist state, but would remain, in promise and potency, as between the community organized under Socialism and its labourers, and must so remain.”
Böhm-Bawerk concludes decisively that, contra Marx, “interest is not an accidental ‘historico-legal’ category, which makes its appearance only in our individualist and capitalist society, and will vanish with it.”
Instead, interest is “an economic category, which springs from elementary economic causes, and therefore, without distinction of social organization and legislation, makes its appearance wherever there is an exchange between present and future goods.”
In sum, Böhm-Bawerk dismantles the view that a system of state-owned means of production will eliminate the “exploitation” of workers’ “surplus value” that so forcefully animates Marxist ideology.
The economic outlook in the United States right now is remarkably positive according to many indicators; unemployment is at it’s lowest since the dot-com bubble, the stock market is at record highs, and inflation is relatively mild. Wages, however, seem to be bucking the trend. Growth in nominal wage rates has remained modest despite a tight labor market, puzzling many commentators. The blame has been spread widely; China, robots, and Baby Boomers are the target of one recent article. However, the answer for this puzzling phenomenon could perhaps be found in the work of John Maynard Keynes.
One of the central tenets of Keynesian economics is the concept of ‘sticky wages;’ the belief that wages, more so than other prices, are inherently inflexible and rigid, particularly in the downward direction. This key plank of Keynes’ theory has often been used as an argument against deflation and as an impetus for monetary expansion in a recession. Although, these policy prescriptions have been dealt with countless times, what of the underlying claim?
It turns out that praxeology per se has very little to say about the existence, or non-existence, of sticky wages. Assuming that by ‘sticky’ all that is meant is that it takes a long time for wages to adjust to market pressures, the only judgment being made is a quantitative one. Mises constantly stressed throughout his work that the only judgments praxeology can make are strictly qualitative. For example, if there is a increase in the demand for labour, we know qualitatively that the wage for labor must rise, ceteris paribus. However, in the exact same sense that we cannot predict the magnitude of this increase in wage rate, we can never predict the time it will take for wages to increase.
How Markets can Encourage Sticky WagesThere are many reasons for expecting wage rates to be less flexible than other prices. Bob Murphy has gone as far as to suggest that flexible wages rates would no doubt be a “market failure.” This argument is simple; workers don’t like uncertainty, if their wage rates fluctuated as freely as the price of a barrel of oil they would be forced to bear much more uncertainty. A long-term fixed-wage contract transfers the burden of bearing uncertainty from the laborer to the entrepreneur. By virtue of their position entrepreneurs are more apt to take on this kind of risk, likewise, laborers by demonstrated preference of not being entrepreneurs clearly value reduced uncertainty. This function is no different to that served by future markets in transferring entrepreneurial risk from producers to speculators.
Government Mandated Stickiness vs. the MarketplaceOf course, not all of the ‘stickiness’ in wages can be attributed to the normal functioning of the market. It will come as no surprise that there is a long history of government intervention either purposely or inadvertently decreasing flexibility in the labor market. During the Great Depression, wages seemed to demonstrate a ‘stickiness’ of unprecedented proportions. In money terms, wages fell modestly, but, once you adjust for deflation and declines in productivity real wage rates actually rose significantly during the first few years of the Great Depression. It seems unlikely this remarkable ‘stickiness’ was a result of a change in worker preferences. In fact, Herbert Hoover instituted a whole host of measures designed to keep wage rates constant, repeatedly encouraging businesses to fix wages in order to save the economy.
Further analysis of the myriad of government policies of the last century reveals case after case of increased ‘stickiness;’ minimum wage laws have made downward wage adjustments illegal beyond a certain point, unemployment benefits reduce the incentive to accept a lower wage after losing one’s job, and repeated inflation has caused workers to expect a continuous rise in money wages, further exacerbating the psychological aversion to a lowering of wages. However, not all policies are one-sided in their effect. The bundling of healthcare with employment has made switching costs higher, as workers may be without health care if they lose their job, thus incentivizing longer-term employment contracts. Similarly, increased regulation has made the cost of employee training higher, incentivizing employers to desire longer-term contracts. Ultimately, there can be little doubt that these (and many other) policies have had a significant effect on the flexibility of labor markets.
But all this inflexibility isn’t inherently bad. The downside is that in a period of recovery, growth, or boom (whichever we are currently in) wages may be slow to keep pace with inflation and increases in output because the terms are often locked in. Any increases in wages can be expected to lag other indicators, even employment. Conversely, during the ‘bust’ phase of the business cycle, to correct for the malinvestment and overconsumption of the "boom," requires that factors of production fall in price so that they can be reallocated to their most valuable stage of production. But if the price of labor is slow to fall in price, this adjustment period will take longer, and hence we will be stuck in a longer recession.
This does not mean that all improvements in labor market flexibility are desirable, as shown above a certain level of ‘stickiness’ is natural on the market and is highly valuable to workers. Instead the key distinction is between natural market stickiness and artificial government stickiness. The former is the outcome of the individual valuations regarding uncertainty, whereas the latter necessarily deviates from the preferences of the market.
Since the introduction of the euro, officially measured consumer price inflation in Germany has not made any great leaps. It has averaged 1.5 percent per year. It reached its highest value in 2008 at 2.8 percent and its lowest value just one year later at only 0.2 percent. In 2020, it has been negative for certain months but was 0.4 percent for the entire year. Do these figures provide a representative picture of the general price trends?
It is not surprising that the answer to this question remains controversial, because price inflation measurements are used to make subjective variables of economic life appear objective. How does the standard of living of citizens change? How much higher is real income today compared to twenty years ago? How much more expensive is a basket of goods of the same quality in one year compared to another? But just what equal quality even means in the course of technological progress and innovation cannot be determined objectively. Therefore, this question will never be answered conclusively.
However, there are also gaps in the official measurement of price inflation, and these can be determined without subjective value judgments. The Harmonised Index of Consumer Prices (HICP), by whose trajectory much of the ECB's monetary policy is justified, is an index for current consumption. It therefore essentially focuses on consumer goods prices and systematically excludes the prices of capital goods and future goods. Using the HICP to assess the overall standard of living thus reduces citizens to mere consumers in the present. But they are more than that.
Each individual has a more or less developed strategy to plan and make provisions for the future. People are not only consumers in the present moment, but also savers and investors who plan for future consumption (their own or others’). Quality of life is therefore determined not only by how much I can consume today, but also by how well I can provide for tomorrow. This is why price inflation for capital goods and assets is important. However, the HICP does not take it into account.
Moreover, the general tax burden is important. It makes both present consumption and providing for the future more difficult. "Public goods," such as education, health, infrastructure, environmental protection, and law and order, that are financed by taxes in turn have an impact on the general standard of living. Here, too, the general trend in quality cannot be determined objectively. For some, the quality of public goods has declined; for others, it has not. What can be objectively determined here, however, is the monetary price that citizens have to pay for them. It can be quantified by the total tax burden.
Taking into account both assets in the form of stocks (DAX) and residential property (index calculated by the Bundesbank), as well as the price of public goods in the form of total tax revenues, yields substantially higher inflation rates for Germany since the introduction of the euro.For more details see Karl-Friedrich Israel and Gunther Schnabl, “Alternative Measures of Price Inflation and the Perception of Real Income in Germany” (CESifo Working Paper 8583, Oct. 2, 2020). The question is how much weight to assign to the individual components in order to calculate an alternative index. Again, there is no objectively correct answer. Hence, the alternative index presented below makes no claim to general validity.
According to the OECD, the average total tax burden of a German household is about 40 percent of gross income. Therefore, a weight of 40 percent for total tax revenue is plausible.
Many households spend a substantial share of their gross income on the purchase of a residential property over a long period of time. Therefore, the Bundesbank's residential real estate index is assigned a weight of 15 percent. The DAX is given a weight of 10 percent to reflect investment in stocks. The HICP makes up the remainder of the alternative index with a weight of 35 percent. The following table shows the average annual inflation rates of the individual components and of the calculated alternative index.
Table 1: Average Annual Inflation Rates in Germany
Period
HICP
Residential property
DAX
Tax revenue
Alternative index
1999–2019
1.49%
1.92%
4.75%
2.97%
2.57%
2010–2019
1.42%
4.20%
8.32%
4.01%
3.74%
The alternative index has risen by an average of almost 1.1 percentage points faster than the HICP per year since 1999. This divide has increased over the past ten years with the advent of unconventional monetary policy. Since 2010, officially measured price inflation has been about 2.3 percentage points below the calculated alternative measure. What does this mean for an average household living primarily on labor income?
Figure 1: Median Nominal and Real Wages in Germany[[{"fid":"95775","view_mode":"default","fields":{"format":"default","alignment":"center","field_file_image_alt_text[und][0][value]":"German wages","field_file_image_title_text[und][0][value]":false,"field_caption_text[und][0][value]":"","field_image_file_link[und][0][value]":""},"type":"media","field_deltas":{"1":{"format":"default","alignment":"center","field_file_image_alt_text[und][0][value]":"German wages","field_file_image_title_text[und][0][value]":false,"field_caption_text[und][0][value]":"","field_image_file_link[und][0][value]":""}},"attributes":{"alt":"German wages","class":"media-element file-default media-wysiwyg-align-center","data-delta":"1"}}]]
The median nominal gross wage per hour increased by 1.59 percent per year between 1999 and 2017, according to data from the Socio-Economic Panel of the German Institute for Economic Research. If the HICP is used to calculate real wages, real wage growth is still positive, but only at a sobering rate of 0.12 percent per year.
However, if we use the alternative inflation measure, real wages fell by 0.97 percent per year between 1999 and 2017. Between 2010 and 2017, the average annual growth rate of real wages was even –2.17 percent. This means that the median wage per hour in 2017 still had about 83 percent of the real purchasing power of the median wage in 1998. On average, people can buy less from their working wages when more than just the goods of everyday consumption are taken into account.
This result is due to disproportionate asset price inflation and a rising tax burden, which of course affect different households differently. Households that live almost exclusively on labor income and have no real assets, but try to build up real savings for the future, suffer from this development. Young families in particular, which cannot count on the material support of their parents' and grandparents' generation, are finding it more difficult to establish a comfortable economic existence. The anxiety and existential fears of the average German household, which one hears about more and more frequently, are not surprising in light of disproportionate asset price inflation. With a broader look at price inflation, it becomes clear that real labor income of the citizens has been devalued substantially beyond direct taxation. Households that cannot increase their income through capital gains are the first to suffer.
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President Joe Biden has promised to raise the minimum wage from $7.25 to $15 per hour.
Some economists are of the view that the increase in the minimum wage could cause an increase in unemployment. Other economists think that the increase is unlikely to harm the labor market. Hence, they are of the view that raising the minimum wage could lift the workers' living standards.
For example, in a study conducted in the 1990s, economists David Card and Alan Krueger examined a minimum wage rise in New Jersey by comparing fast-food restaurants there and in an adjacent part of Pennsylvania.David Card and Alan Krueger, “Minimum Wages and Employment," American Economic Review 84 (1994): 772–93. They found no impact on employment.
Based on this study, many mainstream economists have pressed for an increase in the minimum wage, which they hold is going to raise workers' living standards.
In a recent study, the National Bureau of Economic Research (NBER) surveyed a body of economic research on minimum wage increases and rebutted the notion that empirical data show no impact from minimum wage hikes. The authors find that in all the available research on the subject they reviewed, there is a “clear preponderance” of findings that show a job-killing impact.
The documentation of job losses is even more pronounced for teenagers, young adults, and the less educated. “The body of evidence and its conclusions point strongly toward negative effects of minimum wages on employment of less-skilled workers, especially for the types of studies that would be expected to reveal these negative employment effects most clearly,” economists David Neumark and Peter Shirley wrote.David Neumark and Peter Shirley, "Myth or Measurement: What Does the New Minimum Wage Research Say about Minimum Wages and Job Loss in the United States?" (NBER Working Paper 28388, January 2021).
Given the contradictory results, is there an alternative approach to decide whether the increase in the minimum wage will result in an increase or reduction in employment?
Can Historical Data Tell Us How the Economy Works? Note that the so-called data that analysts are looking at is a display of historical information.
According to Ludwig von Mises in Human Action (pp. 41-49),
History cannot teach us any general rule, principle, or law. There is no means to abstract from a historical experience a posteriori any theories or theorems concerning human conduct and policies.
Also, in the The Ultimate Foundation of Economic Science (p. 74), Mises argued that,
What we can "observe" is always only complex phenomena. What economic history, observation, or experience can tell us is facts like these: Over a definite period of the past the miner John in the coal mines of the X company in the village of Y earned p dollars for a working day of n hours. There is no way that would lead from the assemblage of such and similar data to any theory concerning the factors determining the height of wage rates.
Furthermore,
The historian does not simply let the events speak for themselves. He arranges them from the aspect of the ideas underlying the formation of the general notions he uses in their presentation. He does not report facts as they happened, but only relevant facts.
Contrary to the natural sciences, facts in economics cannot be isolated and broken into their simple elements. The realities of economics are complex historical facts that have emerged on account of many causal factors.
In the natural sciences, while a scientist can isolate various facts, he does not know the laws that govern these facts. All that he can do is hypothesize regarding the “true law” that governs the behavior of the various particles identified. He can never be certain, however, regarding the “true” laws of nature. On this Murray Rothbard wrote,
The laws may only be hypothecated. Their validity can only be determined by logically deducing consequents from them, which can be verified by appeal to the laboratory facts. Even if the laws explain the facts, however, and their inferences are consistent with them, the laws of physics can never be absolutely established. For some other law may prove more elegant or capable of explaining a wider range of facts. In physics, therefore, postulated explanations have to be hypothecated in such a way that they or their consequents can be empirically tested. Even then, the laws are only tentatively rather than absolutely valid.Murray N. Rothbard, “Towards a Reconstruction of Utility and Welfare Economics,” in On Freedom and Free Enterprise: The Economics of Free Enterprise, ed. May Sennholz (Princeton, N.J.: D. Van Nostrand, 1956), p. 3.
In economics however, we do not need to hypothesize, for we can ascertain the essence and the meaning of people’s conduct. For instance, one can observe that people are engaged in a variety of activities. They may be performing manual work, driving cars, walking on the street, or dining in restaurants. The essence of these activities is that they are all purposeful.
Furthermore, we can establish the meaning of these activities. Thus, manual work may be a means for some people to earn money, which in turn enables them to achieve various goals like buying food or clothing.
Dining in a restaurant can be a means for establishing business relationships. Driving a car may be a means for reaching a particular destination.
People operate within a framework of means and ends; they use various means to secure ends. We can also establish from the above that people’s actions are conscious and purposeful.
The knowledge that human action is conscious and purposeful is certain and not tentative. Anyone who tries to object to this in fact contradicts himself, for he is engaged in a purposeful and conscious action to argue that human actions are not conscious and purposeful.
Various conclusions derived from this knowledge of conscious and purposeful action are valid as well. The theory, that human action is conscious and purposeful stands on its own regardless of what the so-called data is showing. Needless to say, the established theory does not require any statistical verification.
Contrary to natural sciences, in economics we do not hypothesize, we know the essence of things, i.e., that human action is conscious and purposeful. Hence, in economics we do not have to set a hypothesis and then test it.
For instance, we know that all other things being equal, an increase in the demand for bread will result in an increase in its price. We do not require a statistical verification that this is so.
Minimum Wages and Unemployment Given that each individual’s ultimate goal is their life maintenance and well-being, a businessperson is unlikely to pay a worker more than the value of the product that the worker generates. If a worker generates per hour a value of $10 toward the business, then the businessperson is not going to pay more than this amount.
If the minimum wage is set at $15 per hour while the worker can only generate a value of $10 per hour, it will then be illegal for the business to pay the worker less than the minimum wage of $15 per hour.
Consequently, in such a scenario, the business would be forced into laying off the worker, since employing the worker for $15 per hour is going to undermine the profitability of the business.
It is only through the increase in capital goods, i.e., through the enhancement and the expansion of the infrastructure, that labor can become more productive and earn a higher hourly wage.
President Biden claimed during his Super Bowl interview that “all the economics show” that if the government imposes a $15 minimum wage then “the whole economy rises.” For his part, Nobel laureate Paul Krugman has claimed for years that “[t]here’s just no evidence that raising the minimum wage costs jobs, at least when the starting point is as low as it is in modern America.” Is this really possible? Are all of the free market fans on the internet just spouting unscientific nonsense when they argue that a minimum wage hike will hurt unskilled workers?
The quick answer is no; Biden and Krugman are wrong. Although the empirical evidence regarding the minimum wage is not the slam dunk it once was, the studies that find a modest impact on employment couch their results in terms of a modest hike in the minimum wage. But the proposal to raise it from $7.25/hour to $15/hour involves a more than doubling. To my knowledge, not a single peer-reviewed econometric study has looked at the historical evidence and concluded that such a massive increase would have a negligible impact on employment.
In this article, I’ll review the scholarly research on the minimum wage to understand how Krugman can make such a slippery claim. I’ll then demonstrate that the proposed $15 minimum wage hike would be extremely aggressive and make it difficult for millions of young, unskilled workers to get a job in the first place.
The Textbook Treatment of Minimum Wage In an introductory economics class, they can use supply and demand curves to illustrate a major problem with the minimum wage: By insisting that employers pay a higher wage than the market-clearing level, the government will cause a surplus or “glut” of workers on the market. For example, here’s the diagram from my introductory economics text (published by the Mises Institute and available as a free PDF):
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In the diagram above (which comes from lesson 17 in my book), the original market-clearing wage rate for low-skill labor is $5 per hour. At this wage, there are 100,000 low-skill workers who want a job, and employers want to hire 100,000 low-skill workers.
Then the government comes along and sets a minimum wage of $8 per hour. At this higher wage rate, the quantity supplied of labor goes up—more people want to work at $8 an hour than $5 an hour. On the other hand, the quantity of labor demanded drops: when inputs become more expensive, businesses tend to buy fewer units of them.
In the diagram, I supposed that at $8 per hour 120,000 workers wanted a job, but businesses only wanted to hire 80,000. So there is unemployment to the tune of 40,000 workers. Even though they have the same (low) skills as the people with jobs, and even though these 40,000 potential workers would be happy to take a job at the prevailing wage, they just can’t find a match with a willing employer.
Such is the conventional textbook treatment of the economics of a minimum wage. Although it raises hourly earnings for workers who keep their jobs, it makes it harder for low-skill workers to get hired in the first place. If we wonder why the teen unemployment rate is so high—especially for certain historically disadvantaged communities—the minimum wage is one obvious culprit.
It’s important to remember that the minimum wage doesn’t force an employer to hire a worker. Instead, it merely says that if you hire a worker, you have to pay at least such-and-such amount. If the worker in question doesn’t have sufficient skills and experience to produce that amount of additional revenue for the employer, it would be a losing proposition to give this applicant a job. Since most employers aren’t in business to run a charity, the natural response to a minimum wage hike is to “economize” on labor, by adding in more machinery and/or hiring a lower number of more skilled workers to do the job that was previously handled by a bunch of teenagers.
The Empirical Literature For most of the twentieth century, economists of all political stripes agreed with this basic story. The consensus in the empirical literature, as late as the early 1980s, was that a 10 percent hike in the minimum wage would lead to a 1 to 3 percent reduction in employment among teenage workers. (For a more detailed history of this literature, see my EconLib article.)
However, this consensus started collapsing in the 1990s. An important early volley was the (in)famous Card-Krueger 1994 paper, which looked at the case of New Jersey and Pennsylvania and concluded that, if anything, New Jersey’s state-level minimum wage hike increased employment in fast-food restaurants. Since then, there have been many studies that use various techniques to “control for” other variables besides the minimum wage, and which conclude that—contrary to the original wisdom—raising the minimum wage seems to have negligible effects on employment.
Now, to be sure, there are plenty of studies—some of which use similar econometric techniques to construct “control groups” to isolate the impact of the minimum wage “treatment effect”—that still do find that minimum wage hikes tend to reduce employment of low-skilled (such as teenage) workers. For example, Neumark and Wascher (2007) summarized more than a hundred studies published since the 1990s, from both the United States and abroad, and concluded that
the preponderance of the evidence points to disemployment effects…. Of [102 studies], nearly two-thirds give a relatively consistent … indication of negative employment effects of minimum wages, while only eight give a relatively consistent indication of positive employment effects.
So in the quote I relayed above from Krugman, where he said there’s “just no evidence that raising the minimum wage costs jobs,” he is being extremely misleading. What he means is that he rejects the several dozens of recent studies that all present such evidence because Krugman thinks they don’t adequately control for other variables as well as his preferred studies do. (In addition to my EconLib article, you can look at a study I coauthored for the Fraser Institute in which we summarized some of the important papers in this area.)
However, it’s not necessary for the reader to take sides on the empirical controversy. Even if we accept the “revisionist” studies at face value, they do NOT establish that a doubling of the minimum wage will have little impact on teenage employment. To repeat, their econometric results are typically expressed in terms of a 10 percent increase in the minimum wage variable. Surely Krugman and even Joe Biden (?) would agree that raising the minimum wage to $100 per hour would hurt workers, right? So at some point the empirical literature—focusing on modest hikes—obviously doesn’t apply. Since the proposal to raise the minimum wage from $7.25 to $15 involves a more than doubling, we are already in that territory.
For validation that I’m not engaged in right-wing scaremongering, the Congressional Budget Office (CBO) just released an updated assessment of the $15/hour plan. They conclude that the move would lift 900,000 people out of poverty but would also reduce employment by 1.4 million workers. Furthermore, of those 1.4 million, by 2025 half will have dropped out of the labor force altogether.
Before leaving this section, let me quote from a book review penned by a Nobel-winning economist who had similar things to say about the minimum wage to what I just said:
So what are the effects of increasing minimum wages? Any Econ 101 student can tell you the answer: The higher wage reduces the quantity of labor demanded, and hence leads to unemployment. This theoretical prediction has, however, been hard to confirm with actual data. Indeed, much-cited studies by two well-regarded labor economists, David Card and Alan Krueger, find that where there have been more or less controlled experiments, for example when New Jersey raised minimum wages but Pennsylvania did not, the effects of the increase on employment have been negligible or even positive. Exactly what to make of this result is a source of great dispute….
What is remarkable, however, is how this rather iffy result has been seized upon by some liberals as a rationale for making large minimum wage increases a core component of the liberal agenda—for arguing that living wages “can play an important role in reversing the 25-year decline in wages experienced by most working people in America” (as this book’s back cover has it). Clearly these advocates very much want to believe that the price of labor—unlike that of gasoline, or Manhattan apartments—can be set based on considerations of justice, not supply and demand, without unpleasant side effects. This will to believe is obvious in this book: The authors not only take the Card-Krueger results as gospel, but advance a number of other arguments that just do not hold up under examination. (bold added)
For those readers familiar with my podcast with Tom Woods, you will not be surprised to learn that the writer of the above book review was Paul Krugman, from 1998.
The $15 Minimum Wage Is Very Aggressive According to fans of the minimum wage hike, namely the progressive Economic Policy Institute in a 2019 analysis, the $15 floor would directly raise the pay of 28.1 million workers who currently earn less than $15/hour. (In addition, the EPI estimated that 11.6 million workers earn more than $15 but would still see a pay hike as employers tried to distinguish their pay from the new minimum wage.) The 28.1 million workers represent about 19 percent of the wage-earning workforce.
In contrast, the previous round of minimum wage hikes was phased in starting in 2007, when the minimum wage was gradually raised (over two years) from $5.15 to $7.25. Another EPI study at that time praised the legislation, estimating that it would directly benefit only 5.6 million workers, which at the time was a mere 4 percent of the wage-earning workforce. Notice the huge contrast: the previous minimum wage hike only (directly) affected 4 percent of workers, but the current proposal would affect 19 percent.
Another way of assessing the aggressiveness of the current plan is to note that, even adjusting for price inflation, it would put the “real” minimum wage at the highest level in US history.
Conclusion The proposed $15/hour minimum wage would be a bad idea in any economy, but it will be disastrous in our current context, where the economy has been rotting for a decade-plus from insane monetary policy and ludicrous federal budget deficits. Even according to fans, the proposal would impact almost quintuple the number of workers as the last round of minimum wage hikes (begun in 2007), and the current plan would push the minimum wage to a record-high level (even adjusting for price inflation). If the Biden administration wants to create an army of millions of young Americans who can’t get a job, this is a great plan.
One argument against the idea of technological unemployment, offered by many people who today sincerely style themselves as leading defenders of the free market, goes that automation will create more jobs than it destroys but due to the nature of the market, the nature of those jobs is, if not fundamentally unknowable, functionally indescribable for the purposes of the argument over automation. How could a person a hundred years ago, the reasoning goes, predict the existence of jobs like “app developer,” “nuclear engineer,” or “diversity and inclusion consultant”? The jobs of the future will be just as foreign to us as our jobs would be to those of the past, and we do not lament the world’s present paucity of candlestick makers and buggy whip manufacturers. While these people are more correct than their opponents, It must be acknowledged that this argument for the market is so thoroughly uncompelling that you might think it was originally concocted by its enemies. One may as well say that after automation, we will all get well-paying jobs with vacations, pension, and so forth once we enter the New Jerusalem, or after we achieve full communism. In fact, far from being unknowable, the types of jobs created by automation are highly categorically predictable. Automation in the production of higher-order goods directly creates jobs in producing lower-order goods that require those same higher-order goods as inputs. Automation in the production of consumer goods both increases living standards and makes human laborers more price competitive relative to machines.
When a firm or industry is automated, jobs will be created in precisely those industries which use, as a factor input, the good or service whose production has recently been automated. This is the case regardless of the specificity of the input. For example, if there is a breakthrough in the production of semiconductors, more computers can and will be made, whether by existing firms or by new, increasingly niche ones. Likewise with electricity itself. Cheaper electricity means that nearly every firm on the grid faces reduced operating costs. Firms that otherwise would have been unprofitable suddenly become profitable, able to be brought into being by a sufficiently alert entrepreneur. The first place a recently replaced worker should look for work is at his previous employer’s client firms. In economic terms, he should attempt to shift to producing a lower-order good in the same supply chain.
Consider a world in which a full half of working men are employed mining for coal, which provides most of the world’s electricity. One day, a nuclear power plant goes online, more than doubling the nation’s energy production and selling its power at an order of magnitude below the previous price. The plant only employs a couple dozen engineers. Over the course of a year, a supermajority of coal plants and mines shut down, and a mere fraction of the coal miners shift over to mining and transporting uranium, which has over 150,000 times the energy density. Just as it is obvious to any observer that society has plainly been made better off through the proliferation of affordable, emissions-free electricity, it should also be intuitively clear to all but the most stubborn of antifuturists that the loss in jobs amounts to little more than a speed bump in the economic lives of the newly unemployed coal miners. This is because electricity is a factor input in nearly all lines of production in any modern economy. Cheap electricity creates jobs, because it makes previously outlandishly expensive projects suddenly potentially profitable.
Importantly, the productive opportunities created will always exceed the amount destroyed, because technology is only ever adopted, in market economies, when it is profitable to do so. More wealth is created than is consumed, and so there are more resources to be combined in potentially productive ways by any entrepreneur who detects the opportunity. Unprofitable technologies, for readers wondering, are usually adopted when countries are attempting to pursue a policy of import substitution. For example, Nazi Germany’s prewar attempts to wean firms off their dependence on imported oil by forcing companies to use an ersatz oil made of liquified coal. Another example would be American subsidization of “renewable” energy sources like wind and solar.
But what about automating the production of the lowest-order goods, a.k.a. consumer goods? Surely jobs automated out of the yo-yo factory are essentially gone forever, since no businesses, aside toy stores, will see their expenses fall thanks to a reduction in the price of children’s toys. This is correct. However, it is important to remember that consumer goods are a factor input in the production of labor, and labor is a factor input in the production of everything that hasn’t been automated. People are, in terms of opportunity cost, now cheaper than new machines, which produces yet more firms willing to hire them. The automation in the production of pure consumer goods, to the extent that there are such things, represents real wage increases, or an increase in the standard of living, for everybody else in the society.
In other words, automating the production of yo-yos makes all human workers marginally more price competitive relative to machines in other industries, by decreasing the cost of living. Here it is also important to remember that consumption does not create jobs; savings do. If consumers spend less on toys and stow the rest at the bank, this is not in any way a waste. That money enters the loanable funds market. Toys are cheaper, parents have more disposable income, which is more money to put in the bank. More savings lower the natural interest rate, making that money available to spend on other goods and services, in either case raising the demand for labor. Where the decreasing cost of living improves the relative standing of humans in comparison to machines, increased investment raises the total demand for labor, whether in human or robot form.
Importantly, this logic applies to all service sector employment. Among non-Austrians who concede the net positive consumer effects of automation in the past, the service sector is conceived as something of an “employer of last resort.” But, they argue, what happens when waitresses, doctors, garbagemen, secretaries, bankers, lawyers, and economists are also automated? For the survivors of this imagined labor market decimation, this will be an age of unparalleled material prosperity, but what about for everyone else? Will I change my tune then?
One cannot “run out” of job openings, even in the service sector, in a growing economy, no matter how many robots are made and sold. All entrepreneurship in the service sector represents a cost-of-living decrease, or real wage increase, for anybody who consumes the service. Automation of service sector jobs, assuming it is caused by market conditions, will always improve the competitiveness of human labor relative to robotic, and this increase in available resources will raise the number of potentially profitable ventures at every stage of production, increasing demand for labor in all of its forms.
Finally, I should emphasize that this seemingly flawless process I describe is the process of economic development. It seems too good to be true, but it isn’t, and in the end we know it is true because some countries are richer than others by orders of magnitude and people from poor countries risk their lives just to live off the scraps of rich ones. Technology improves living standards, because all development that can be appropriately called development is made with an eye toward final use by consumers.
This should not be taken to mean that all automation is worthwhile. Automation, like any other entrepreneurial process, is useful and good only to the extent that it efficiently allocates resources to satisfy consumer ends. The only way to know if this is actually the case for a given technology is the market test of profit and loss. There are plenty of ways for the government to force or push the adoption of a technology. One of the most obvious is through the introduction of a minimum wage causing the replacement of human labor with self-serve kiosks. Different forms of regulation and subsidy can deform price signals such that more valued resources are squandered in the development and deployment of a technology than were produced or saved through its implementation.
When one encounters something one does not understand, one should not fear it, but neither should one begin to mystify it. And many defenders of technological growth do mystify that which they appear not to understand when they advance arguments involving “fundamentally unknowable” gains from technology. But these gains, categorically, are knowable. Technology creates productive opportunities “downstream” of its deployment. Those opportunities are not, and can never be, entirely taken up by more robots, because machines’ very existence as goods in a market economy increases the capabilities and competitiveness of humans.
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If you’re tired of binge-watching Netflix, there are likely a few restaurants in your neighborhood who would love to hire you. A job might help relieve the boredom.
On the other hand, why work when one can just be one of the more than 6 million former workers now collecting “pandemic unemployment insurance”? Those millions are in addition to the 3.6 million former workers collecting ordinary unemployment insurance. For many workers, these benefits now total $300 per week. In March, President Biden extended the program until September.
And then there are the many millions more who have recently received a piece of the third round of stimulus payments. All three bailouts combined to total around $460 billion in checks mailed out to Americans.
So, it shouldn’t be an enormous shock when we find out that many employers are having trouble finding workers. One McDonald's restaurant is offering bonuses just for showing up for an interview. One eatery is offering a $400 sign-on bonus.
Nor is it just the service industry that can’t find workers. Construction employers are reporting shortages, as are trucking operations. The NBC affiliate out of Green Bay, Wisconsin, reports that the price of gas may increase because so few tank truck drivers can be found. The problem is “a lack of qualified drivers.”
There are no employees available in California. We are paying dishwashers $21 to start. The two main reasons people tell me they won't work: 1. They are making enough on unemployment and would rather not work; 2. With schools closed, they can't pay someone to watch their children
— Chef Andrew Gruel (@ChefGruel) April 29, 2021 Even government employers—who tend to offer more job security and a lot more vacation time than private firms—are offering extra cash to get more applicants in the door.
Millions of Workers Have Also Left the Labor Force An endless stream of unemployment checks isn’t the only thing fueling the worker shortage. Record numbers of Americans are leaving the labor force entirely.
In January 2020, 96 million American adults were outside the labor force. That shot up to 104 million in April of last year. But as businesses opened up and increased hours, there were still 100 million Americans not in the labor force. In other words, over the past year an additional 4 million workers exited the labor force. These people are not actively looking for work, are not on unemployment, and are not factored into the unemployment rate.
Of the 100 million adult Americans who are out of the labor force, 6.5 million say they “want a job now.” Yet, for whatever reason they're not collecting any wages, even in a time when we're being told anyone can walk into a restaurant and get immediately hired.
In other words: yes, millions of Americans are being paid to stay home, but that's not the whole picture. Millions more have given up looking for work altogether.
The Illusion of GDP Growth This contrasts with the rosy picture of employment that the regime is now trying to paint. For example, we’re being told that the employment situation is excellent because the headline unemployment rate has fallen over the past year from 14.4 percent to 6.2 percent. That’s certainly a big improvement, but it also suggests that the number of unemployed job seekers remains high. An unemployment rate of 6.2 percent, after all, puts unemployment at a higher level than anything experienced between 1994 and 2008. It’s not exactly a “low” rate, and it’s nearly double the unemployment rate of April 2019 (3.3 percent). The narrative of an employment boom is so sketchy that even Fed personnel—i.e., Minneapolis Fed president Neel Kashkari—admits the unemployment rate is more like 9.5 percent.
And then there’s the unconvincing overall narrative of economic growth. As noted last week by Daniel Lacalle, one should naturally expect big increases in GDP when massive amounts of monetary stimulus have been pumped into the economy. GDP is based largely on spending, and spending goes up as trillions of new dollars are printed. Lacalle writes:
There is an overly optimistic consensus view about the speed and strength of the United States’ recovery that is contradicted by facts. It is true that the United States recovery is stronger than the European or Japanese one, but the macrodata shows that the euphoric messages about aggregate GDP growth are wildly exaggerated.
Of course gross domestic product is going to rise fast, with estimates of 6 percent for 2021. It would be alarming if it did not after a massive chain of stimuli of more than 12 percent of GDP in fiscal spending and $7 trillion in Federal Reserve balance sheet expansion. This is a combined stimulus that is almost three times larger than the 2008 crisis one, according to McKinsey. The question is, What is the quality of this recovery?
The answer is: extremely poor. The United States real growth excluding the increase in debt will continue to be exceedingly small. No one can talk about a strong recovery when industry capacity utilization is at 74 percent, massively below the level of 80 percent at which it was before the pandemic. Furthermore, labor force participation rate stands at 61.5 percent, significantly below the precovid level and stalling after bouncing to 62 percent in September. Unemployment may be at 6 percent, but it is still almost twice as large as it was before the pandemic. Continuing jobless claims remain above 3.7 million in April. Weekly jobless claims remain above 500,000 and the total number of people claiming benefits in all programs—state and federal combined—for the week ending March 27 decreased by 1.2 million to 16.9 million.
These figures must be put in the context of the unprecedented spending spree and the monetary stimulus. Yes, the recovery is better than the eurozone’s thanks to a fast and efficient vaccination rollout and the dynamism of the United States business fabric, but the figures show that a relevant amount of the subsequent stimulus plans have simply perpetuated overcapacity, kept zombie firms that had financial issues before covid-19 alive, and bloated the government structural deficit and mandatory spending.
A Temporary Labor Bubble So why the labor shortage?
As with GDP overall, it's helpful to look to money printing as a partial explanation—we should absolutely expect to see a surge in demand for employment as a result of the central bank printing up trillions of dollars. In our money printing–based economy, printed money is being substituted for production. Thus, millions of workers can stay home while demand remains steady, or even increases. Idle workers still have a lot of dollars to spend. Demand continues upward even as production falls.
Contrast this with how a labor market works in a normal economy. In a normal economy, the fact millions of workers are electing to stay home rather than produce anything should have a depressing or stabilizing effect on the demand for labor. That is, 10 million or so idle workers would mean workers have far fewer dollars to spend. This in turn would mean less demand for goods and services such as restaurant meals and retail sales. This would then tend to keep wages flat as well.
As Say’s law reminds us, production must precede demand in a functioning economy. It is the act of producing goods and services which produces the income necessary to increase demand.
So what are the prospects for this labor bubble? In the short term we can hazard some guesses about what happens. Demand is likely to continue to increase, as is price inflation. As Warren Buffet recently highlighted at a shareholder meeting, "We are seeing very substantial inflation…. We are raising prices. People are raising prices to us and it's being accepted."
In the medium and long term this will mean reduced purchasing power for those relying on unemployment checks. How the employment bubble will play out beyond this summer, however, will depend somewhat on whether the federal government again extends benefits and at what payment level. If benefits remain flat, then the real value of benefits will decline and at least some workers are likely to more enthusiastically seek work again.
In any case, we're still in the early stages of a boom fueled by unprecedented amounts of money creation. Trillions have flowed into households via "stimulus" checks and unemployment checks. Yet although there are growing signs of price inflation, consumer prices in many cases are still adjusting to the new realities of money supply greatly outpacing production.
For those looking for a chance to build some job experience, now is the time to do it. This wage and employment bubble is unlikely to last.
Large-scale unemployment is another name for a surplus in the labor market. Equilibrium is a state which markets will naturally move toward as buyers and sellers look for mutually advantageous exchanges. Firms can always get some value from additional labor, even under pessimistic forecasts of sale prices and quantities. Workers earning zero wages can improve their situation by accepting a job—even if they do not accept the first offer. Therefore, a labor market in surplus will absorb unemployed labor at a lower wage. When a market is in surplus, the direction the price must go toward equilibrium is down.
Or so it was thought before Keynes. Keynes’s notion of unemployment equilibrium was a break with prior theory, which held that markets clear through price and quantity adjustments. When there is a surplus, a lower price is needed to clear a greater quantity of employment.
Keynes had two contrary arguments. The first, that wages are inherently stuck at a particular monetary value. It is unclear how this value was arrived at in the first place. It may have been a wage that worked during good times. Keynes’s view is that unemployed workers are unwilling to accept a lower nominal wage than they made at their last job. The second was that even if a lower wage would, at first, employ more workers, the lower wage rate would remove so much purchasing power from the labor force that labor would be unable to purchase the increase in output. Business sales would drop off, business firms would have to lay off the workers, and the market would be back in surplus.
The British-Austrian economist William Harold Hutt identified Keynes’s theory of unemployment equilibrium as the most novel and original aspect of his work. Henry Hazlitt’s second law is the observation that everything in Keynes’s General Theory is either unoriginal or untrue.Henry Hazlitt, The Failure of the “New Economics”: An Analysis of the Keynesian Fallacies, by Henry Hazlitt (Auburn, AL: Ludwig von Mises Institute, 2007), loc. 274, Kindle. The first law being his one lesson. From Hazlitt we know that the unemployment equilibrium doctrine is untrue.W.H. Hutt, The Keynesian Episode: A Reassessment (Indianapolis, IN: Liberty Fund, 1980), p. 43.
Hutt was a great but underappreciated critic of Keynes. His critique of the New Economics was rooted in two foundations: the first, Say’s law; the second, an appreciation of how a functioning market price system can integrate all useful services into productive use. Hutt took on both of Keynes’s arguments with a powerful rebuttal. Against the claim of wage rigidity, he argued that, to the extent that wages are rigid downward, this was not a natural feature of labor markets. Workers can and do adjust to changes in the demand for their services, not only by accepting lower wages when that is their best option, but also by moving around to better opportunities. This can be a better wage doing the same thing or a change to an industry or line of work where better opportunities lie. The wage rigidity that was a crucial plank of the unemployment doctrine was a particular characteristic of the British economy at the time. The problem had come about due to labor union coercion, which prevented a free labor market from operating. Hutt also drew attention to incentive payments for not working, such as unemployment insurance, which discouraged workers from accepting a wage that businesses were willing to offer. The Babylon Bee explained the same problem in a piece called “Shocking Study Finds Paying People Not to Work Makes People Not Want to Work.”
The words “general theory” appeared in the title of Keynes’s book. Yet his theory was not a generalization of prior economic theory. His ideas applied to the particular institutions that existed in England in the 1930s. His approach to the unemployment problem relied on the fact that while wages could not easily fall, contracts between labor and industry equally prevented them from rising. Consumer price inflation could lower nominal wages in real terms. At a low enough real wage, businesses could hire labor at the contracted nominal wage.
According to Hutt, a better solution would have been to confront the pricing problems directly. The pricing problem was a political problem and the solution lay in that realm. Political leaders, said Hutt, should have explained to the voters the damage to the general good done by the unions, and pushed them to accept realistic wages so that their members could have returned to productive work.
Keynes’s second argument was a backup in case the first one failed. He argued that even if nominal wages could be reduced, that would not alleviate the chronic unemployment. The program of lower wages would fail due to secondary adjustments that would counteract the initial rise in employment. His argument was as follows. Workers spend their wage income in order to demand all goods and services. Lower wage rates would result in lower wages paid in the aggregate. Any initial gains in business profitability from lowering costs would be competed away in the form of lower selling prices for their products. Earning lower wages, workers would have less ability to demand the products that their employers produced and sold. There would be a subsequent fall in business revenues. Businesses would, after a time, have no long-term demand for the new labor. They would have to lay off the newly hired workers. The system would simply chase wages in a downward spiral of reduced purchasing power and reduced employment.
Hutt made several attacks on Keynes’s second argument. The first is that even at a lower wage, aggregate wages paid could well increase. An increased volume of employment, which is a larger number, multiplied by at a lower wage, a smaller number, could be more, and will be if small wage cuts result in a large amount of demand at that price.Hutt, Keynesian Episode, p. 274. The average wage will rise if the unemployed workers are included with a wage of “zero” when calculating the average before the wages were reduced.Hutt, Keynesian Episode, p. 275. Hutt also turned the inflationist argument against Keynesians. They suggested that only a bit of inflation would do the job. If only a small amount of inflation was necessary to bring the unemployed back to work, Hutt observed, then only small cuts in nominal wages should do the same.
Hutt quotes from The General Theory, “[T]here is, as a rule, no means of securing a simultaneous and equal reduction of money wages in all industries.” Hutt criticized Keynes’s model for treating the labor market as if it were a single market with a single wage.
Through thus thinking rather uncritically about aggregates, Keynes appears to have assumed that wage-rate reductions imply reduction of aggregate earnings, irrespective of whether the labor price which is cut is of workers in an exclusive well-paid trade, or that of workers in suboptimal pursuits, doing poorly paid work because they were excluded from well-paid opportunities.Hutt, Keynesian Episode, p. 273.
Hutt hammers on the point that there are as many wages as there are types of labor. Workers, and therefore wages, differ by industry, by geography, by skill, and by season. Only those particular niches in which there is a surplus of supply might need reductions in wages in order to clear. Other markets may stay the same or in some cases wages could increase alongside falling wages elsewhere. Hutt observed that “what is usually needed is not a blanket change in relative price-cost relationships such as is achieved through unanticipated inflation, but a mass of individual adjustments.”Hutt, Keynesian Episode, p. ??.
The core fallacy in Keynes’s second argument, according to Hutt, was his failure to take Say’s law into account. This law is the observation that individuals demand one thing through the supply of another. Whenever a producer brings supply to the market, they also demand in a different form, another good. He applied Say’s law to the process of reemployment. As the unemployed workers in certain industries rejoin the workforce, they produce. As their production is supplied to the market, they regain their ability to demand other goods and services produced by other industries. The point that Keynes missed in his vicious downward spiral was that the increase in production following from the lower wage per worker results in more supply of goods. Hutt agreed that there is a feedback cycle, but it works differently than Keynes explained. One of the factors driving wages down was the depressed condition of the economy, which—ironically—was caused in part by politically induced wage rigidity.Hutt, Keynesian Episode, p. 285–86; and William H. Hutt, “Illustrations of Keynesianism,” in Individual Freedom: Selected Works of William H. Hutt, ed. Svetozar Pejovich and David Klingaman (Greenwood Press, 1975), p. 36. When more goods are produced, the prices of goods fall. Workers can buy more with the same wage or buy the same amount with a lower wage. Overall lower prices for goods mean a higher average real wage for everyone.
Hutt traced the operation of Say’s law across different sectors. He pointed out that an increase in the demand for carpenters will not—in the main—come from a fall in the wages of carpenters. (For this example to work, it is not even necessary that there exist much unemployment in carpentry). The major part of the increase in the demand for carpenters will come from the other industries in which the wage reductions had the greatest impact on increasing employment. The workers in those areas—through their employment—become producers, and therefore suppliers, and by Say’s law demanders of other, noncompeting goods and services, carpentry included.
This illustrates the circularity in Keynes’s reasoning. The General Theory contained a refutation of Say’s law based on the incorrect thesis that it only worked when all resources were fully employed.See Stephen Kates Says Law and the Keynesian Revolution: How Macroeconomic Theory Lost Its Way (Cheltenham, UK: Edward Elgar Publishing, 2009) for a full history of this issue. There is nothing in Say’s law that is specific to full employment or lack of employment. Why should it only work in some cases and not others? Keynes advances two main arguments to prove his point, with unemployment equilibrium being one.Savings not equal to investment in general is the other. Yet his argument for unemployment equilibrium already depends on ignoring the effects of Say’s law.
The fallacy of price adjustments being self-frustrating was the foundation on which the “new economics” was built.Hutt, Keynesian Episode, p. 287. Would we have had a Keynesian revolution without it? According to Hutt this was both the most critical novelty of Keynes, and the first part of the Keynesian edifice to fall to hostile attacks. Hutt, who was active in the field during the ’40s and following Keynes’s death, reports that the unemployment equilibrium thesis was quickly discarded.Hutt, Keynesian Episode, p. 45. And yet “Keynes’ sophisticated theory of unemployment equilibrium set the greater part of the academic world of economists on a false trail.”
The idea of universal basic income (UBI) is near the peak of the hype cycle. Democrat Andrew Yang made it the flagship issue of his presidential campaign. A small industry of advocates tirelessly push arguments in its favor. I will address two in this piece. The first: the claim of permanent elimination of jobs. The second: the resulting need for income to compensate for the fall in purchasing power from the lack of work. Both rely on long-discarded economic fallacies.
No one doubts that robots, software, and automation eliminate some need for human labor where adopted. But the automation doomers' scenario assumes that when jobs are eliminated by automation in one place, that number of jobs are permanently gone. For this to be true, there would have to be no compensating growth in the need for labor elsewhere.
The purchasing power argument says that the economy will suffer from an overall loss of demand due to the reduction in income when people are out of work. Martin Ford (futurist and New York Times bestselling author of Rise of the Robots), thinks that UBI is “the answer to job automation” because it will “ensure that consumers have money to spend—because the market economy requires that there be adequate demand for products and services.”
These two arguments turn out to be related through Say’s law. This is the name we give to the observation that when a producer supplies a good, their action constitutes a demand for a different noncompeting good. It is correct that if the workers remained permanently unemployed, the economy would experience a lack of demand from the reduction in supply. The formerly productive workers, who are no longer producing, no longer contribute to the supply of goods. By not supplying, they remove their contribution to demand as well. However, if the workers who were made redundant in one industry can find gainful employment doing something else, then they may continue to supply, and therefore to demand. And then, there would be no systematic deficiency of demand.
The UBI advocates are correct that some jobs are replaced when capital goods do the work that was done by labor. Robots are a capital good. If the same amount of output can be produced by a mix of more robots and fewer people, an industry will not offer as much employment as before. Does it follow that when one industry uses fewer workers there is no need for their services anywhere else? How would the advocates of this view explain the enormous growth in the labor force since the Industrial Revolution two centuries ago—a period characterized by increasing capital intensity?
The answer is that fall in demand for labor in the more capital-intensive industries is only the start, not the end, of the story. The economist does not stop with the immediate effect of a change. The true economist analyzes how the entire system adjusts to a change. Hayek saw “the increasing concentration on short-run effects … not only as a serious and dangerous intellectual error, but as a betrayal of the main duty of the economist and a grave menace to our civilization.”F.A. Hayek, "The Economics of Abundance," in Critics of Keynesian Economics, ed. Henry Hazlitt (Irvington-on-Hudson, NY: Foundation for Economic Education), pp. 125–50, esp. p. 128.
Where did the robots come from? Was there a huge warehouse of unused robots dropped by aliens? Someone had to produce the robots. The process of creating the new capital goods starts with less consumption to fund additional saving and investment. This initially creates more demand for labor in the capital goods sectors, to build the robots. This demand to some extent compensates for the loss of employment in consumer goods from spending shifted from consumption to capital goods. The creation of robots requires engineers, manufacturing, sales, marketing, and all of the other services that form a full supply chain.
Jesús Huerta de Soto in Money, Bank Credit, and Economic Cycles shows how the increase in the supply of capital goods relative to labor changes the most profitable combinations of labor and capital for that industry. The lowest-cost mix then consists of more capital and less labor. More output in that industry can be created at lower cost by fewer people:
This increase in real wages, which arises from the growth in voluntary saving, means that, relatively speaking, it is in the interest of entrepreneurs of all stages in the production process to replace labor with capital goods.Jesús Huerta de Soto, Money, Bank Credit, and Economic Cycles, trans. Melinda A. Stroup, 4th ed. (Auburn, AL: Ludwig von Mises, 2020), p. 329.
The adoption of more productive capital goods raises the productivity of labor. This means that less labor is required in that industry to produce the same quantity of goods at lower cost. Mises explains what happens following the substitution of capital for labor:
What happens is that labor is rendered more efficient by the aid of machinery. The same input of labor leads to a greater quantity or a better quality of products. The employment of machinery itself does not directly result in a reduction of the number of hands employed in the production of the [product].Ludwig von Mises, Human Action: A Treatise on Economics, scholar's ed. (Auburn, AL: Ludwig von Mises Institute, 1998), p. 768.
The lower costs are through the resulting price competition passed on to consumers. This is another way of saying that consumers now have a higher real wage. Consumers can buy the same amount of products—let’s say shoes—as before and still have some money left over to buy something else that they previously could not afford.
All increases in voluntary saving exert a particularly important, immediate effect on the level of real wages…. increases in saving are generally followed by decreases in the prices of final consumer goods. If, as generally occurs, the wages or rents of the original factor labor are initially held constant in nominal terms, a decline in the prices of final consumer goods will be followed by a rise in the real wages of workers employed in all stages of the productive structure. With the same money income in nominal terms, workers will be able to acquire a greater quantity and quality of final consumer goods and services at consumer goods’ new, more reduced prices.Huerta de Soto, Money, Bank Credit, and Economic Cycles, p. 329.
This is another way of saying that when one industry becomes more productive, everyone else gets a raise. Contrary to Martin Ford, there is no need for income to generate purchasing power disconnected from production. More capital-intensive production, through lower prices, generates the purchasing power to buy the final products.
But that is still not the end of the story. The ability of the workers in other industries to buy something new creates the opportunity for some businesses to expand production, or for new businesses to make new products. Without the drop in the output prices of the more capital-intensive industries, these new products would not have been affordable for these workers. The labor needed to produce those products would not have been available at a wage that would have made it profitable to produce them, because the labor would have been more urgently needed doing something else. When the labor was replaced by robots, things changed.
Mises describes the process using a hypothetical product called “A” to make the point that the release of labor from some uses makes other uses economically viable:
The technological improvement in the production of A makes it possible to realize certain projects which could not be executed before because the workers required were employed for the production of A for which consumers’ demand was more urgent. The reduction of the number of workers in the A industry is caused by the increased demand of these other branches to which the opportunity to expand is offered.Mises, Human Action, p. 768.
Incidentally, this insight explodes all talk about "technological unemployment.”
The British Austrian school economist William H. Hutt addressed the unemployment of labor extensively in several of his books. He emphasized the importance of price flexibility. Any productive service has a value, and therefore a price, somewhere, doing something useful. Price flexibility and open labor markets are necessary in order for workers to be matched up with work that consumers value the most. When labor productivity increases in one industry, on average more goods are available for everyone to buy, but wages can still rise, or fall, in each industry or geographic area, depending on the skills of the workers in the labor market, the types of goods and services in demand, and the quantity and quality of preexisting capital goods. If the job losses occur in the increasingly capital-intensive industry, those workers must be free to offer their services in other areas where there is demand.
Problems with the price system can appear to manifest as chronic unemployment. What appeared to be permanent unemployment in the British labor market of the 1930s, according to Hutt, was in reality excessively rigid and inflexible pricing in British labor markets. He blamed this primarily on labor unions, who, with government encouragement or inaction, were demanding above-market-clearing wages in many industries.W.H. Hutt, The Keynesian Episode: A Reassessment (Indianapolis, IN: Liberty Fund, 1980), p. 150. A secondary factor was the subsidization of unemployment through the welfare system, which encouraged unemployed workers not to seek employment, and not to accept a wage offer when one was on the table.
A UBI scheme does not replace the demand from the unemployed workers. According to Say’s law, demand originates with production. Paying people not to produce destroys their ability to demand. Hutt cites the nineteenth-century economist Frederick Lavington’s observation that the consumers’ proper name is “other producers.”Hutt, The Keynesian Episode, p. 150.
Handing out money can only transfer demand created by the people who remain in the labor force. If the program is paid for with money printing then the resulting inflation only transfers purchasing power from those workers who had sold their services for money and not yet spent it. The unemployed can only create demand by returning to work, by becoming producers again. The traditional means for people to obtain income—by earning it—is still the best way, even with robots.
In the 1970’s we heard the earth was going to get so crowded we’d be falling off. Now the panickers have flipped to population decline. They were wrong in the 70’s, so are they wrong again? Is a declining population catastrophic?
Countries from Germany to Japan are investing in mass immigration or pro-birth policies on the assumption that they must import enough warm bodies to stave off economic collapse. I think this is mistaken. Falling population on a country level is certainly no catastrophe and, indeed, may be positive. I’ll outline some reasons here.
Historically, the first question is why population declined. If it’s the Mongols invading again then, yes, the economy will suffer. Not because of the death alone, but because wholesale slaughter tends to destroy productive capital as well.
On the other hand, if the population is declining from non-war, we have a well-studied natural experiment in the Black Plague. Which is generally credited with the “take-off” of the West. Because if the population declines by a third while capital including arable land stays the same, you get a surplus. Same resources divided by fewer people.
Think of zombie movies where people are running around with nearly unlimited resources at their disposal — free cars, riverfront penthouses. That, in diluted form, is what a declining population gives us — more land, more highways or buildings, more resources per person.
Now, if the population’s declining not because of a terrible disaster like the Plague, rather because people simply want fewer children, then you don’t even get the massive hit from losing productive people. A worker dying at 40 takes a lot of productivity with him, while a child unborn isn’t actually destroying anything but hopes and dreams.
So if the Plague was a per capita economic bonanza to Europe, having fewer children should be an even larger per capita bonanza.
Take Germany; before recent rises in immigration, Germans averaged 1.25 children per woman. This translates into a 1/3 decline in population per cycle (i.e every 75 years if people are living 75 years). So without immigration, Germany might expect a 1/3 decline by 2100. Is this good or bad?
The question breaks into 2 parts: absolute number of people, and changes in age composition. On numbers alone, it’s great for Germans; same physical capital, same amount of land and air and water. True there are fewer taxpayers to amortize shared costs like defense, but these costs are small and, empirically, often scale to the population anyway. For example Holland’s military budget and population are both about 1/5 of Germany’s.
So on numbers it’s great — more stuff for fewer people. Now the second question is age profile. The key here is that a declining population means fewer working-adults to pay out pensions, but it also means even fewer kids. Who are very expensive. The number that captures both is “dependency ratio,” which is the ratio of workers to children-plus-elderly.
To take a real-world example, the UN expects Germany in 2100 to have 68 million people, compared to today’s 82 million — about a 20% decline. The age profile shifts so they expect a third more over-65’s — from 17 to 23 million. Meanwhile, children 14 and under fall from 11m to 9m. So total dependents goes from 28 million today to 32 million in 2100. Meanwhile, population age 15 to 64 goes from 54 million today to 36 million in 2100. Upshot is today a single working-age person supports half a dependent — 54 million carrying 28 million. But in 2100 that worker will support a single dependent — 36 million carrying 32 million. So far so bad, right?
Well, there are 2 big caveats here, both based on long-lasting trends. First, for over a century now people are not only living longer, but living healthy longer. This is called “health expectancy” and, sticking with Germany, is rising by about 1.4 years per decade.
This implies that 65 year-olds in 2100 will be as healthy as 53 year-olds today. While today’s 65-year-olds are as healthy as 2100’s 78-year-olds. This alone would bring the elderly numbers back down to today’s, but the lower number of children means worker burdens actually decline.
Of course, this would require raising retirement ages in line with health expectancy — 1.4 years per decade — which politicians are obviously deeply reluctant to do.
Second caveat is another long-term trend, economic growth. The irony here is that, from a population growth viewpoint, economic growth is actually the worst-case scenario. Because if the economy crashes instead, then historically the population actually soars — kids become your safety net if the welfare state goes bankrupt. So if we fail to grow, the demographic problem actually solves itself anyway. Either we grow, or population decline was a false alarm anyway.
Quantifying this growth, over the past 50 years Germany has grown 1.65% per year, real per capita. That trends puts a 2100 German worker making 4 times what they do today. Keep in mind this is likely underestimating the benefit, because any outperformance makes Germans richer yet, while any catastrophe probably makes them have more kids.
So, summing up, rising health expectancy implies there will actually be fewer dependents in 2100 Germany, while economic growth implies German workers will be 4 times richer, just on growth alone. The demographic burden plunges by 80% or more.
By the way, if you’re freaked out at the prospect of working an extra 1.4 years per decade, that economic growth alone suggests a 50% decline in worker burdens — twice the dependents on four times the income. So even if politicians are spineless, the welfare burden declines even with more dependents.
Bottom line, whether we look at total numbers or demographically, population decline coming from simply choosing to have fewer kids is nothing remotely catastrophic.
Now, a final point: in a worldwide context, more people does tend to increase investment, therefore innovation and economic growth. This is obvious in the aggregate — there wouldn’t be any factories if there weren’t any humans — but people forget. So, on a world-wide level, we should have a bias towards more humans, while recognizing that, on a country level, a shrinking population is certainly no catastrophe.
In an interview on 1 October 2018 EconTalk host Russ Roberts and economist Noah Smith were discussing wage stagnation and workers’ share of income in the US. It’s an interesting conversation but there was one part of the segment that is worth pointing out. Between 47:00 and 49:00 Smith claims that the more concentrated industries with larger firms tends to drive down labor costs. He states:
So, there is actually quite a lot of evidence in terms of correlation; relatively thin evidence in terms of causation. That doesn’t mean that the evidence is wrong or that the phenomenon isn’t happening, or that we won’t be able to prove the phenomenon is happening. But it just means that it’s hard to know in this area.
And what you see is that in those industries where the product side is more concentrated, you’ve seen labor’s share of income also fall more than in industries where it’s less concentrated. So, in less concentrated–in industries that have become less concentrated, that have not become more concentrated, you see that labor’s share of income tends to be higher than in industries that have become more concentrated. So, there is a correlation for you.
Later Smith and Roberts get into a disagreement about lowering costs for large companies. When mentioning large firms like Tyson, Target, and Walmart, Smith points out that labor is roughly 60 percent of costs, claiming that the overwhelming majority of the time, driving down costs to increase profit margins means lowering labor costs, which equates to falling pay for workers. Roberts replies that you can lower costs without lowering labor costs, which Smith dismisses, “…on what evidence? Do you have any evidence, any evidence at all? Because I have evidence showing that labor costs go down. That point is that I’ve already presented evidence that they are holding down wages.”
Roberts says he has intuition, to which Smith snickers. But his intuition is sound (starting around 58:00):
I’m an employee of Target, K-Mart, local firm; and my firm goes out of business. Now, I’m stuck working at–I have a smaller set of retailers who can employ me.
My argument, by the way, would be that it’s easy to apply technology to lower all the costs. And let’s think about that slowly. I can employ technology to reduce my inventory costs. It’s obvious that all these firms have done that. I can also employ technology to lower my labor cost. And the way I do that, is I pick a different mix of workers.
I find a technology — to take an obvious example — if I’m McDonald’s, and I can have my cashier push a button rather than actually work a cash register, I don’t have to have as skilled an employee. I’m going to have lower wages as a result. But I’m not squeezing anybody. I’m taking a different kind of worker than I had before. But the point I was trying to make before you jumped down my throat with that empirical evidence … is that — and this is my Tyson’s point, also: Just because I can’t work at K-Mart any more — K-Mart actually is out of business — doesn’t mean that I’m stuck working at Walmart.
Just because my Tyson opportunities have gotten smaller, my chicken-plucking opportunities are getting smaller, is that most of the people who are working in these industries we are talking about don’t have very specialized skills in these areas. They have lots of employers they can work for. Their wages are low because their skills are low. Not because they are being squeezed. That’s my point.
Smith concedes that point before moving on to other complications of the argument. Now, while Smith correctly points out that wage growth has stagnated (slowed) in the last 20 years, Roberts’ point is important. As long as labor is mobile enough to switch between firms and industries, then we must look at the heterogeneous nature of labor in the same way we should with capital. Different kinds of labor and different sets of skills must “fit” into the proper arrangement of production. Workers are not getting “squeezed” if their skills allow them to shift into other areas of employment. Of course, there is always the case of frictional unemployment for various reasons. But with a change in technology to reduce costs, a different “mix” of less-skilled labor can be inserted into a given company so that a reduction in the pay of that labor is commensurate with the reduction of the skill level relative to the previous employees.
Thus, we can see that while the empirical evidence seems to favor Noah Smith’s position that labor is receiving a smaller share of income in industries with less but larger firms, the intuition by Russ Roberts can better point to how this perspective can be misinterpreted from the correlations observed. Put simply, theory can help explain causality when interpreting the data.
[Originally published in The Freeman, May 1, 1959.]
Coercion marks the beginning and corruption the conclusion of the march of union power observable in the McClellan Record. The process begins with the use of compulsion to secure members. Thereafter new and different coercive devices are used to bind the unwilling employees to the union. After a union has learned the usefulness of coercion in increasing membership, it falls into the habit of using even more in disputes with employers.
Some trade union leaders hold that any employer who resists their demands is an “enemy of the labor movement” who must be taught a lesson, and, if he continues to resist, must be exterminated. If employees themselves refuse to acquiesce in strikes, if, instead, they exercise their right to continue working during strikes, they are considered traitors, against whom brutal reprisals are not only permissible but praiseworthy.
Law-enforcement officials sometimes stand in the way, however, and it, therefore, becomes necessary to take care of them, too. Pure bribery is not always the appropriate method here, and often a generous campaign contribution will do as well. If the laws of the land pose an obstacle to the use of union power against traitorous employers and employees, then the laws must be changed, and full-scale political action, largely financed by membership dues contributed in a substantial degree by workers of differing political views, is the appropriate vehicle for change. Candidates who support the unions’ claims of special privileges to coerce and compel get extensive, expensive, and enthusiastic political support; those who insist that the laws of the land should apply to trade unions are marked for extinction. Too often the unions have their way, although a startling exception here and there indicates that the black night has not yet fallen.
Meanwhile, alongside the structure of traditional unionism, there begins to grow in its shadow a murky pseudo-unionism. A two-stage process is at work. Frequent use of coercion and violence by traditional unions induces their leaders to include on their staffs—alongside college-trained economists—men with criminal records and backgrounds of brutality; if dirty work is to be done, it is just as well to have a person around who has had some experience with it. And the practical privilege to coerce, to extort, to shake down, to compel (such as has accrued to the unions) is precisely what the denizens of the underworld, the professionals of organized crime, have been searching for most avidly, ever since the rich pickings under Prohibition dried up.
If a single picket will harm a business badly enough to make the owner sign up with the union, maybe it will also serve to shake loose some immediate money. In either case, the picket line is coercive, and if it is a specially privileged form of coercion in the one case, why not in the other? Thus the professional extortionist discovers a new tool for his trade, and thus to are born “racket-picketing” and its associated shakedown techniques.
Convicted criminals are in the unions then with both feet—as adjuncts to traditional unions, and on their own, cynically using the form of unionism as a cover for their age-old methods of getting ahead in the world. The one thing they have never learned is how to work for a living. As union agents and leaders they live very well off the product of those who have learned how to make a living through socially useful work—the businessmen and workingmen of the country.
Although society at large may know very little about all this, it pays the bill—an overwhelming, extortionate, and destructive bill. A shakedown induced by “stranger-picketing” has to be made up by the businessman somehow.
The situation is not made any better by the shrill accusations of the union leaders against businessmen about the high cost of living and unemployment. The plain fact is that no businessman ever likes to cut back production. He does so only when he has to. More often than not the union leader has been responsible for pricing union members out of the market. For that, he ought to be fired, or law and law enforcement ought to be rigorous enough to keep him from abusing workers, union members, businessmen, and the public.
Special Privilege—Unlimited Power The point cannot be emphasized enough. The harm done by criminals masquerading as union officials is enormous and filled with the most ominous signs for the future of society. But it is still less than that produced by the power of the traditional unions. They daily coerce and brutally attack workers who decline to join or refuse to participate in strikes. They throw out of work hundreds of thousands of men because of their artificially inflated wage costs. They create irresistible inflationary pressures and compound the evil by encouraging costly and destructive deficit-spending by governments. Through the use of legal and political special privileges, they tie up entire industries into tight monopolies and cartels which abuse the public and threaten the destruction of the free and competitive economy which has always been the American ideal.
This is the panorama of union power. Traditional unions have secured for themselves special privileges which vest in them unlimited power. This power, like any other unlimited power, can only be abused, and it is abused. Violence and economic coercion by themselves create socially harmful conditions, the consequences of which are infinite and unpredictable. Besides, they exert a magnetic force, drawing to the trade unions some of the worst types of criminals, who find there an environment which suits them.
The combination is a destructive force which no society can long survive: on the one hand, abuse of the citizenry and impairment of peaceful, progressive, productive activity; on the other hand, dissolution of the moral and political structure. In the special privileges of coercion and compulsion which unions have gained, there breeds a rotten growth which corrupts the whole moral and political structure of society.
The Welfare State Philosophy The same thinking which is producing the Welfare State has also been largely responsible for the special privileges accorded trade unions. Furthermore, the welfare-state ideology has given the State so many diverse jobs to perform that it can no longer properly perform the basic job for which it was designed. That job was to insure domestic tranquility by protecting honest citizens against thugs and criminals. Proper performance of that basic function requires, obviously, a primary and predominant preoccupation by the government with the police force and the administration of justice.
While we expend our substance in granting special privileges and subsidies to the strong pressure groups, encouraging idleness and unproductiveness, we under man our police forces and pay them poorly, so that they have neither the numbers nor the quality of men necessary to do what is, after all, the basic job of civilization: keeping the peace.
While recognizing, then, that Senator Ives had hold of a piece of the truth in observing that the crime disclosed in the McClellan Record is a part of the larger problem of law enforcement created by the welfare-state distortion of the role of government, his view is not on the whole accurate. At least it is not the whole truth if he means to say that there are no independent causes for the prevalence of crime and corruption in trade unions. It is not the whole truth because it fails to explain why, among all the other private associations of society—the business firms, the bar associations, the medical associations, and the thousands of other private associations in this country—violence, crime, and corruption do not prevail as they do among trade unions.
Violence, crime, and corruption prevail among trade unions to a degree unmatched in any other private association because trade unions have acquired from society and the law special privileges allowed to no other private association. There is every reason to believe that any other private association accorded the same privileges would manifest the same characteristics which the McClellan Record discloses in trade unions.
If, for example, businessmen were allowed to compel the purchases of their customers, to assault them when they showed any intention of removing their patronage, and to block access to competitors—there is very little reason to believe that such conduct would not become common business practice, leading to more and more of the same as the selective process wore on in business in the way that it has in trade unions : with the productive and the ingenious giving ground before the thugs, the bullies, and the master strategists of large-scale organized violence.
Businesses compete in a civilized way partly because the law compels them to do so and partly because the law’s compulsion has created a selection process which grinds out the thugs and the lawless and advances the able and the industrious. Among trade unions, precisely the contrary process of selection has been going on, with, as might be expected, precisely the contrary results.
Errors in Government The sources of the special privileges which trade unions enjoy are to be found in the policies and conduct of the federal government over the past thirty years, beginning in 1930 and continuing to this date. The responsibility is nonpartisan, with Republicans and Democrats sharing it, although not in equal proportions. It is distributed in another way. Rather than being confined to one or another of the three branches of the federal government, it is shared, instead, by all three: the legislative branch, the executive branch, and the judicial branch.
Unwise laws have been made worse by the administration and interpretation they have had, while socially beneficial laws have been reduced to impotency by a reluctant administration, on the one hand, and dubious interpretation, on the other. Without exonerating Congress from its share of the responsibility, one still must acknowledge in the interests of accuracy that its record is not as defective as that of the other parties: the National Labor Relations Board, representing the executive branch; and the United States Supreme Court, representing the judicial branch.
Accuracy calls for further qualification. There have at all times been on the Supreme Court some justices who resisted valiantly and with great legal ability the errors and excesses of that Court. Again, some of the justices who earlier participated in the most dubious decisions of the Court have shown since then that theirs were good-faith errors; and, as all good and learned men will do upon finding themselves in error, they have taken steps toward correction.
It should also be noted that at frequent intervals between 1935 and 1953 there were some members of the NLRB who recognized and dissented from improper decisions of the Board. Moreover, the majority of the Board since 1953 has been guilty of nothing comparable to the outrageous misinterpretations of the Taft-Hartley Act handed down by the majority which prevailed from 1949 to 1953, although the more recent majority has been very slow to correct some and has failed completely to reverse the most serious of its predecessor’s misinterpretations.
Whereas the NLRB and the Supreme Court have preponderantly contributed decisions heightening the abusive powers of trade unions and negating the efforts of Congress to reduce such powers, the record of the Federal Circuit Courts of Appeals has been one, preponderantly, of the kind of excellence in legal scholarship, fair-mindedness, and fidelity to law and precedent which is to be expected of all judges. The Circuit Judges, with some exceptions, have neither tried to give trade unions and their officials more privileges than the laws of Congress intended nor have they negated, except by direct mandate of the Supreme Court, the laws of Congress which were intended to limit abusive and monopolistic trade-union conduct.
Little need be added at this point on the kind of corruption at all levels which we have witnessed in the preceding chapters…. But we must bear in mind that moral and political corruption of the varieties recounted their rot integrity at all levels and thus weaken the fiber of society, making it prone to further corruption of a million kinds in a million ways, every day. Nonunion men treated brutally as outlaws and union members as serfs, the infiltration of unions by professional gangsters, extortion from businessmen, bribery and corruption of public officials, the theory that trade unions are entitled to special privileges from government—no society can survive much of that for very long.
Destructive Monopoly Powers All these put together, however, probably do not equal and certainly do not exceed the danger inherent in the necessary course of monopolistic unionism. As much as trade unions may protest their virtue and distort the truth, it is the opinion of the most competent economists in this country, and of the greatest economists in the world, that monopolistic trade unionism will destroy any free enterprise system if it is allowed to proceed unchecked. Many of America’s ranking economists have come to more or less this same conclusion—Fritz Machlup, Milton Friedman, David McCord Wright, Edward H. Chamberlin, Philip Bradley, Henry C. Simons, and many others of equal ability and disinterested devotion to truth. Their conclusions are shared by economists of unsurpassed international reputation, including Friedrich A. Hayek and Wilhelm Roepke, as well as the man who has in our time achieved the greatest stature of all in the social sciences, in my opinion, Professor Ludwig von Mises.
Steps in the Process All these men agree, not only as to the fact but as to the process by means of which trade unions will, if unchecked, bring about the destruction of the free society. First, compulsory membership leading to dictatorial control of all workers; second, through the ensuing monopolistic regimentation of all industry, the securing of wage structures higher than the market will bear; third, in inevitable consequence, drastic and severe unemployment of great numbers of workers; fourth, clamorous insistence that government, through deficit spending, create jobs and other subsidies for the men thrown into unemployment by the union monopolies; fifth, loose money policies by the monetary arm of a government politically committed to “full employment” policies; sixth, a crackup inflation; seventh, consequent mangling of the lives of all those who have attempted to save; eighth, increasing chaos and dislocation; ninth, the rise of vicious demagogues playing upon the confusion, chaos, and dissatisfaction of the populace to secure for themselves dictatorial powers which permit them to apply totalitarian remedies which the Constitution of the United States inhabits; tenth, dissolution into the jungle.
The McClellan Record demonstrates the fundamental culpability of the federal government for the intolerable conditions which exist in labor relations. Attacks on thugs, racketeers, and power-hungry union leaders miss the real point. The real problem, the real fault, lies in a theory of government which ensures an awful paradox: a virtual anarchy within a plethora of laws. We have thousands upon thousands of rules and statutes, millions upon millions of government employees. Yet we have no law.
Government’s Limited Role The ultimate responsibility falls to the public. But this fact does not absolve the members of the government from all responsibility. It is their job to inform the public that they cannot deal with all the things which the special privilege groups are seeking and still run a decent government in the general welfare. Then it is the job of the public to understand that government, like all other human institutions, has very narrow limits. It may be able to do a fair job of providing for the national defense, of keeping the peace, of enforcing the laws, and of administering justice in the courts—if it devotes all its time and energy to those difficult tasks. But it cannot do those things at all, as the McClellan Record so vividly demonstrates if its energies are expended on every pet project upon which every pressure group from the National Education Association to the National Committee for the Protection of Tropical Fish comes running to Washington for help.
I do not know of any short way to bring about limited and therefore effective government in this country; that will come only when large numbers of people appreciate its value and insist upon it. Yet I am convinced that the jungle, retrogression, and decay are the necessary result of unlimited government, just as they are the necessary result of unlimited power in trade unions. No civilization can long survive unlimited power in any hands. The greatest contribution of the McClellan Committee lies in its overwhelming documentation of that truth.
Originally published in The Freeman May 1959