There is a common argument in favor of the minimum wage. It goes something like this:
If we raise the minimum wage, workers will have higher wages. Thus, they will spend more on goods, and this demand will stimulate the economy.
There are a few problems with this line of thinking.
1) This assumes that the economy should be shifted toward consumption from investment. Since investment is geared toward the future, it is possible such a policy, if correct, could have the consequence of lowering the amount of goods in the future.
2) Even if the minimum wage is raised, for any sense to be made of this argument, the aggregate amount going to workers in wages has to be increased. If the basic argument against the minimum wage is right, that a price control on wages creates unemployment, then it is not necessarily the case that aggregate wage payments will initially go up, which is what is needed to “stimulate the economy.”
3) Ok, what if we drop, for the sake of argument, the claim that unemployment will cause aggregate wage payments to go down (or stay at the same level)? We have to immediately recognize that an increase in aggregate wages is still hard to stipulate. For example, if business A decides to increase wage payments, that’s less money it can spend on other factors of production, such as capital. In other words, it has to decrease payments to its suppliers, and these other businesses will end up reducing their own workers’ wages.
4) For aggregate wages to go up, then, it seems, that this money has to ultimately be taken out of payments to natural resources. Aggregate payments to natural resources has to go down. But an arbitrary allocation of money away from natural resources toward labor hampers the market’s function in economizing and allocating resources to their most highly valued ends. The resulting allocation will be inferior to the market allocation, and goods of lesser value will be produced since a less efficient combination of resources will be employed in creating those goods. The minimum wage will have the unintended consequence of producing lower quality goods for the very people who want it, even if it increases their wages.
#4 is my own line of thinking – as far as I know, I have not seen it in other Austrian works I have read (I might simply not be very well read though!). What do you guys think about this?
John Iadarola recently commented on a Louis Gohmert speech in the House of Representatives blaming welfare for causing women to make bad decisions.
I dont think any mom with absolutely no desire to have babies is going to suddenly have a huge one just because of welfare. But I don’t think it’s wrong to say that welfare can be an influencing factor on the decision. A mom who already had some desire to have a baby but before regarded the cons outweighing the pros only by a little might decide in the affirmative after factoring welfare into her decision.
For example, let’s say it takes 100 “satisfaction points” before a mom decides to have a child. Maybe she has 95 right now, but by adding an expectation of receiving welfare benefits, she gets the extra 5 necessary points.
Iadarola brings up a study that found no statistical difference in the amount of children had between welfare recipients and non-welfare recipients. I’ve already been through the problems with empiricism in economics, so I don’t have to comment in detail about it again. It suffices to say for now that, clearly, the study does not disprove any causal relationship we garner from the logic I have described above. Individuals value more goods greater than less goods; as such, women will value more money over less money and it obviously will factor into their decisions. Only in cases where the women do not see the money received in welfare as a good, such as the case where one finds the lack of self-reliance involved in accepting welfare as demeaning, will the causal relationship not be present.
What’s debatable is whether statistical analysis can be used along with judgment in deciding the size of the causal effect (this seems reasonable to me, but I haven’t made up my mind on it yet).
Finally, one side note, because I don’t want to let this slide: Iadarola is not necessarily correct when he criticizes Gomer for saying that in the 60s, he disliked the government’s policy. All that we can directly take from Gomer’s statement is that the policy began in the 60s, not that it was eating away at him in the 60s.
As long as the amount of ends is greater than the amount of means with which we (human beings) can achieve them, there will always be ends to allocate those means toward. In other words, in an economy, as long as the wants we have exceed the resources we can use to satisfy those wants, we will always have wants to allocate those resources toward.
If this is too abstract for you, take a hypothetical example. Imagine a world where people only have 100 total wants. They have 20 resources (which include land, labor, and capital), and with these 20 resources, they can only achieve 60 of their wants, meaning 40 remain unsatisfied. Now suppose that one resource, due to technological reasons or whatever, displaces another resource. Now 19 resources can achieve 60 wants, where 20 (resources) were needed before. What will the displaced resource now be used for? Clearly, it can now be geared toward one of the remaining 40 unsatisfied wants.
(A reader might quickly object, but what if the resource isn’t applicable to any of the 40 remaining wants!? The answer is that it might not be used at all, but in this post, we are examining labor in particular. Labor is the most nonspecific resource: it can be applied to a huge variety of different wants. Thus, this objection is not very relevant to this discussion.)
Is this example applicable to the real world? Certainly, and in greater force. In the real world, we essentially have an infinite amount of wants. If I could have the Starship Enterprise, I’d love someone to build it for me. If I could have
100 lam 100,000 1 million lamborghinis, well sure, why not? Resources, meanwhile, are finite. There is only a certain amount of land and natural resources, capital, and labor in existence at any time.
Since labor is a scarce resource, it seems, then, that there is no reason to assume that it could never be allocated toward some end. There should always be a job available if a person is willing to work. So why the mass unemployment?
The real reason is intervention with the price system – but before explaining that, let me introduce two types of unemployment:
1) Voluntary unemployment – this occurs when an individual chooses on his own not to work. He can be an elderly person who has saved enough money to retire. Or he can be a person on a job search who simply hasn’t found a wage worth working for yet. In this latter case, the individual would rather continue searching than accept some low wage. This is because he has enough funds saved to keep his job search for an extended period of time. As his funds dry up, he will become more desperate to find a job and will be willing to accept a lower and lower wage as time goes on. Eventually, he will choose something.
We would expect some amount of voluntary unemployment to constantly exist – there are always people searching for jobs and there are always people being displaced. However, we generally wouldn’t expect any particular individual to be perpetually unemployed – eventually, they will always be able to find another job (examples where this is not the case include where the individual is addicted to drugs, etc.)
2) Involuntary unemployment – also called structural unemployment, this occurs when the government interferes with the free market. The free market is the amalgamation of all voluntary decisions and voluntary exchanges. Involuntary, structural unemployment then occurs when the government intervenes with the price system.
The minimum wage is the easiest example to expound this theory with. Let’s say a homeless, unskilled woman, if put even at her best field of work, can only accomplish $5.00/hr of productivity. If the minimum wage is then, $7.25, she will be permanently unemployed. Employers will not hire her for $7.25 if she only contributes $5.00. As the minimum wage rises, then, the number of individuals permanently unemployed rises. The only way to escape this, is for the unemployed to somehow gain skills without work, which can be tough to achieve if they are not young and in school. The path of learning on the job has completely been taken away from them.
Therefore, when we see the perpetually homeless and the perpetually unable to find a job, there are no obvious effects of harmful choices such as drug addiction (note: even such cases are possibly due to government intervention, if a person is already unable to find a job due to some law, and then becomes a drug addict), and such laws are in existence, the first place we should look at as the culprit are those laws. Other examples include regulations such as laws mandating benefits, such as health insurance. This essentially creates its own minimum wage based off of the cost of the insurance. Workers who contribute less than the amount of cost of insurance will be unable to find a job. (These regulations add up, a minimum wage + mandated benefit would then have a larger effect than that expected from the minimum wage alone). A final example would be government manipulation of the interest rate, a price itself, and interestingly, it is this manipulation that causes the business cycle.
And the evidence is overwhelmingly positive: hiking the minimum wage has little or no adverse effect on employment, while significantly increasing workers’ earnings.
It’s important to understand how good this evidence is. Normally, economic analysis is handicapped by the absence of controlled experiments. For example, we can look at what happened to the U.S. economy after the Obama stimulus went into effect, but we can’t observe an alternative universe in which there was no stimulus, and compare the results.
When it comes to the minimum wage, however, we have a number of cases in which a state raised its own minimum wage while a neighboring state did not. If there were anything to the notion that minimum wage increases have big negative effects on employment, that result should show up in state-to-state comparisons. It doesn’t.
So a minimum-wage increase would help low-paid workers, with few adverse side effects. And we’re talking about a lot of people. Early this year the Economic Policy Institute estimated that an increase in the national minimum wage to $10.10 from its current $7.25 would benefit 30 million workers.
He’s wrong and here’s why:
1) State vs. state cross-sections are still not controlled experiments, by a long shot. There are about a trillion kazillion million (if you were doubtful of my trustworthiness, how do you feel now?) ways one state is different from another. And yes, many of these ways will be relevant for the question at hand (whether the minimum wage affects unemployment maliciously or not).
2) Even if they were close enough to controlled experiments, there is no reason to assume that a historical fact, that a raise in the minimum wage had little or no effect on unemployment in one time period, should carry over to another time period. Human beings are not inanimate objects like the subjects of the physical sciences. Human beings have the ability to choose, and these choices can change over time. Economics deal with human beings, and as such, cannot use historical findings to create some sort of law set in stone. History by definition, has to do with specific dates and times and specific people and specific choices. They are not universals. We say “on April 12, 1950, Jimmy went to the store!” The date and the name and the action all can change as time goes on. The same applies to historical claim regarding the effect of an increase in the minimum wage.
3) Even if we let #1 and #2 slide, it is STILL a wrong statement. We cannot assume that the effect of one increase in the minimum wage, from some amount to $7.25, carries over to another amount, $7.25 to $10.10.
The empirical method applied to economics sucks, plain and simple. There are too many weaknesses with it. Economics is not a natural science, it is a social science. We can’t even point to the success of empiricism like scientists can in the natural sciences. Astronomers can point to correct predictions of objects such as comets, e.g. if we look in the sky at this time, we’ll see the comet right here. All that economists, meanwhile, have to point to, is blatant failures, from terrible predictions about what would happen to the economy (this is right before the Great Depression), to an inability to stop the financial crisis, to this piece of work (this one’s the funniest by the way).
The correct method of economics is not empiricism but praxeology. The social sciences can only lay claims to laws that do not have to deal with particular choices of humans, but the universal characteristics of all human action.
Just anticipating a possible response. Some might say “oh but there could be reasons to assume that something that occurred in history would happen again.” I’m not saying this is impossible, but I’m saying it’s bad reasoning for a science dealing with human action, particularly when other methods are available.
Secondly if you’re wondering “how do you think the minimum wage affects unemployment?,” see here.
From this post, we see how we derive the fact that a person who engages in an exchange must value what he is receiving over what he is giving up.
Note that I am doing this from the point of view of one actor, but it applies to both. It’s interesting that, even with violent exchange, this analysis could be used to say that the individual being coerced also values what he is receiving over what he is giving up.
If Thievery Tom points a gun at Innocent Irene and demands that she give up a banana for his orange, she too is engaging in an exchange. Although violent, she is still purposefully acting, and (assuming she goes through with it) she thus prefers the state where she gives up the banana for the orange over the state where she retains the banana and he retains the orange. In other words, she prefers the orange to the banana.
I’m not sure if this can constitute a meaningful objection to the distinction between voluntary and involuntary action, but it’s something to think about.
My only response to this at the moment is that there’s a very real sense in which doesn’t value what she is receiving over what she is giving up. I don’t remember Rothbard responding to this sort of objection in Man, Economy, and State, and have not read enough Mises to say whether he responds to it or not.
The way it is solved likely revolves heavily around the introduction of voluntary action vs. involuntary action in the logical argument. As I come across this again in Mises or Rothbard, I’ll think about it.
One more thought: if someone responds, “well, of course she now has a new preference scale because of the introduction of a coercive individual,” I could say “well, anytime someone comes along and even offers an exchange, the other individual’s preference scale might change because of the introduction of the voluntary individual.”
And again, I’m not saying this is a meaningful objection nor am I saying that it can’t be easily “solved.” Just something I am thinking about at the moment.
1) All purposeful action involves a preference of one state over another.
2) Exchange is a purposeful action.
3) Therefore, exchange involves a preference of one state over another.
Premise #1: The state preferred is that which occurs with the successful action. The state being rejected is that which would have occurred had the action not been taken.
Premise #2: Exchange is purposeful, it has a goal in mind: to receive something by giving up something else.
Conclusion: This necessarily follows from #1 and #2: because exchange is a purposeful action, it involves a preference of one state over another. The state preferred is that with what is gained and lost in the exchange. The state being rejected is that where what is gained and lost in the exchange is not, respectively, gained and lost. The more common way of saying this is that he who engages in an exchange values what he is receiving over what he is giving up.
I’m doing this mainly for my own benefit. Spelling out the logic will help me understand the arguments more fully and make my own decision whether the stated conclusions do in fact necessarily follow from the premises. Hopefully, it will help others do the same. I don’t think this needs any more justification than that.
I was actually going to make a post saying I was taking a hiatus, because I’m in the middle of some work at the moment. But I figured I could do some GeneCallahan-style blog posts about the stuff I’m reading, since those posts don’t require as much effort above and beyond what you’re already doing and thinking about. (Unfortunately, if you’re reading this blog for insights comparable to what you’ll find on his site, you might be a little disappointed)
Just started reading Human Action. While Man, Economy, and State is fantastic, I don’t think you can get a full appreciation of Misesian methodology and epistemology without reading Mises himself.
Mises calls satisfaction a state where a person cannot and does not purposefully act. If you’re completely satisfied, you have no reason to act. A purpose means you have some goal worth attaining, and this implies this goal is better than what your state would be otherwise. This means some satisfaction is gained from achieving that goal, and thus you were not completely satisfied to begin with.
Mises goes on:
But to make a man act, uneasiness and the image of a more satisfactory state alone are not sufficient. A third condition is required: the expectation that purposeful behavior has the power to remove or at least alleviate the felt uneasiness. In the absence of this condition no action is feasible. Man must yield to the inevitable. He must submit to destiny.
The reason this condition is a necessary one can be demonstrated by an example (if you don’t find it straightforward). Take time for instance. Most people find the forward movement of time an inevitability. There’s nothing you can do to stop it, make it go backward, etc. and thus you don’t purposefully act to accomplish those goals. But what about people that make time machines? Clearly, they’re purposefully acting, right? Yes, but the only reason they are acting is because they have an “expectation” that their action has the power to change time; they don’t think it’s inevitable.
So according to the definition of action as purposeful behavior, expectation of some possibility of accomplishing your goals is a necessary prerequisite.
I have liked a TYT video on economics though it has nothing to do with cronyism in the economy (the only point on economics I typically agree with them on).
Peter Coy, in a Bloomberg Businessweek article, states:
A movement to give every person an “unconditional basic income”—no work required—is gathering speed in Europe. In its biggest victory to date, earlier this month supporters in Switzerland garnered more than 100,000 signatures on a petition and managed to get an initiative onto the national ballot.
The Swiss ballot initiative, which isn’t scheduled yet, doesn’t state how big the unconditional stipend would be, but supporters have mentioned 2,500 Swiss francs a month, which is a little under $2,800.
I’m glad TYT, particularly Cenk, is being honest in this video. A guaranteed paycheck from the government wouldn’t necessarily stop someone from working outright, but it would serve as disincentive to work in numerous ways: 1) if you’re unemployed, you will not try as hard to find a job (as Cenk admits he did), 2) if you do work, you will not work as hard as you used to (because you will have to work less than before to earn the same amount of income), etc. It’s a productivity killer and Switzerland’s standard of living will go down over the years.
For a causal explanation: human beings purposefully act, choosing one action over another based on which action is valued more highly. An individual, in deciding whether/how much to work, weighs the marginal benefit an additional unit of labor gives him (choice of action #1) against the marginal cost of working that is his leisure (choice of action #2). Now, the law of marginal utility tells us the more units of a good a person has, the less he will value each unit. Therefore, as he receives a guaranteed paycheck from the government, he’ll tend to value the benefit less relative to the cost, and thus work less.
(For an explanation of the law of marginal utility, consider yourself having access to X # of units of water. Let’s say units are gallons, and you have 1 unit – in other words, 1 gallon. You’re going to use this gallon for the most important thing to you, which is probably drinking water: after all, you need to survive. Let’s say you get 9 more gallons. Maybe now you can use a gallon to take a shower. What the law of marginal utility states is that, as the number of units you have increases, the less you value each unit. In the previous example, taking a shower was obviously not as valuable as drinking water. If you had to give up a unit, you would give up taking a shower, not drinking water. You’d give up an activity with less value. In other words, you’d give up a unit being used for an activity with less value. But if you only had one unit, you’d have to give up drinking water. The unit for taking a shower is not as highly ranked as the unit for drinking water, and thus, the more units you have, the less valuable uses they will be being used for, and the less value they have.)
Some respond that individuals could be more creative if they had their basic living income provided for. But this doesn’t mean the laws of the marketplace go out of existence. Creativity will have to obey market forces – in other words, people who are creative still need to satisfy the needs of others in order to generate income from their activities. “Creativity” is just another way of saying risky behavior, and individuals with almost $3000 in guaranteed income would take many more risks, a good amount which would end as utter failures.
On the judgment side of things, I believe that this policy would have a particularly horrendous effect on Switzerland’s economy. $2800/month is a lot, even enough to survive off of. It’s possible you could see the workforce destroyed and the tax revenue necessary to pay out the $2800 become smaller and smaller, until it ceased to exist.
I get the argument that people’s basic living should be provided for them. “Human beings have a right to live and goods are not so scarce that we cannot provide for every person’s basic needs in food, water, and shelter.” The issue with this type of thinking is that such a policy of guaranteed income by the government would kill incentives. People don’t have to work anymore – therefore, some people will outright stop working, some people will not try as hard to find work, and some people will “be creative” – but even while engaging in these creative ventures, individuals will lack as much of an incentive to apply this creativity in such a way that they earn income from the market. Losses are now trivial because basic income has been guaranteed. Therefore, the money (in real terms) used to provide for the basic income of citizens will go down, year after year, until scarcity actually is a problem for even basic needs.
And as that happens, if policy does not change, people will starve, and the population will decrease. What’s necessary to maintain a population like ours is private property and the incentives that come with it. The reason poor people in third world nations starve and lack basic amenities is because they lack private property.