Debate a Professor

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    Okay so basic back story here. My professor and I were debating Marx about a month ago and somehow the debate has grown into the ideas of social welfare and the minimum wage. As it is obvious from his arguments he knows little about the Austrian School, although he thinks he understands it, so apparently I haven’t been too successful at getting the arguments across, that or it is just a typical law professor.

    Normally I would respond, but I am absolutely swamped with finals this week. If anyone would like to take a shot at responding to his argument (below) I would gladly appreciate it.

    Happy Holidays!

    See what you think of this:

    This is the phenomenon of working poor: more than 20% of full time working Americans are also recipients of public assistance, resulting in an effective $7 billion subsidy to employers in the fast food industry alone. This should offend your economic sensibilities

    The observation that without minimum wage laws employers are free to game the system by paying below-survival wages and relying on government programs to make up the difference is not new — the US Supreme Court recognized that problem in 1937:
    “The exploitation of a class of workers who are in an unequal position with respect to bargaining power, and are thus relatively defenceless against the denial of a living wage, is not only detrimental to their health and wellbeing, but casts a direct burden for their support upon the community. What these workers lose in wages, the taxpayers are called upon to pay. The bare cost of living must be met. We may take judicial notice of the unparalleled demands for relief which arose during the recent period of depression and still continue to an alarming extent despite the degree of economic recovery which has been achieved. It is unnecessary to cite official statistics to establish what is of common knowledge through the length and breadth of the land. While, in the instant case, no factual brief has been presented, there is no reason to doubt that the State of Washington has encountered the same social problem that is present elsewhere. The community is not bound to provide what is, in effect, a subsidy for unconscionable employers.” West Coast Hotel v. Parrish, 300 US 379 (1937). Over time, however, we have allowed the value of minimum wages to fall so far that we are back where we started:

    SoWalMart makes $17 billion in profits last year while still paying employees so little that they need public assistance. The taxpayers are subsidizing the employer at that point, a direct upward transfer of wealth to the executives and shareholders (keep in mind that the wealthiest 10% of Americans own 90% of shares).

    The strict Austrian school/libertarian argument at this point is obvious: don’t have public assistance. That way people will not take below-survival paying jobs, which will force employers to pay more in order to attract employees. Walmart will have to pay a little more, so its profits will only be $14 billion while all its workers will earn enough to support themselves. Presto!

    There are three potential problems with this solution.

    – First, it doesn’t necessarily work out that way — if the situation is one in which there are more unemployed than available jobs, employers still get away with paying below survival or bare survival wages because people are desperate. Historically, that’s what happened during periods of high unemployment. In the long run, it is possible that higher wages will lead to an expanded economy will lead to full employment for everyone … but that’s not how it has worked out historically, and with the globalized labor markets there is no plausible story for that outcome occurring in the present era.
    – Second, if the labor market is such that these virtuous market effects will be realized, there will nonetheless be a delay and a lot of people will not make it through the winter. That also happens — fuel assistance programs were created because people were freezing to death.
    – Third, even once these virtuous market effects have produced higher paying jobs, those who don’t get those higher paying jobs are simply left to go hungry. Poverty is most prevalent in rural areas, where people often do not have access to jobs even if they are available. (One could imagine a public assistance program that shipped people to places where employment is available, but that gets really expensive.) The fact that millions of people were hungry is what created the political pressure for assistance programs in the first place.

    If any of these observations are correct, then the libertarian argument translates to “let the children starve.” This is not hypothetical — hunger is an issue in America today, but it was a dreadful reality for millions of rural poor in the era before social assistance. And there is a reason most means-tested programs focus on children or families with children — there is no plausible argument that children deserve to go hungry or not have heat in the winter because they chose their parents poorly. That is, even if you are willing to accept that sort of fate for your fellow adult Americans. (As for relying on private charity, in the history of the world that has never been a successful strategy.)

    This is why most people react with revulsion to strict libertarianism — it’s not that the Austrians wanted children to go hungry, but they were perfectly willing to accept that outcome rather than sacrifice their strict version of “liberty.”

    But! If you agree that we must not let the children starve, then you are back with the problem that public assistance distorts the labor market at the bottom by subsidizing employers. This becomes the argument for a minimum wage. Again, this is a distortion of the labor market, one that could (the evidence is hotly disputed) result in fewer jobs as the price of ensuring that the jobs that exist pay enough so that full time workers do not need public assistance.

    So the choices that policymakers have seen for the past century or so are:
    1) have public assistance AND a livable minimum wage. You will have some people living on assistance, and others working — you will not have the phenomenon we see today of 40 million full time working poor. There may also be inflationary pressures, which require attention–at this point the Austrian School arguments about the effects of interest rates become salient. Right now, of course, we have near-zero interest rates and no inflationary pressures, but that’s another discussion.
    2) have public assistance and no livable minimum wage. That’s today’s situation — with the result that employers receive a subsidy for their labor costs from the taxpayers.
    3) have no public assistance and no livable minimum wage. That was the situation before these programs were created.

    Is there a fourth alternative?


    Just a few points I’d stress. I read through it quickly because I’m short on time, but I’m confident in these points nevertheless:

    1) Competition (not perfect competition, but real competition). If workers are being paid less than their productivity, then this creates an opportunity for profitable competition. If there isn’t any competition, the first place we should look to find out why is government regulation. Retail isn’t some industry like telecommunications either, where there are network effects, huge economies of scale, etc. Also, industries other than retail could also be involved to bid these workers away.

    2) Anytime he points to the economy being bad, that is the fault of institutional reasons: the Federal Reserve and fractional reserve banking causing the business cycle, etc.

    3) “The strict Austrian school/libertarian argument at this point is obvious: don’t have public assistance. That way people will not take below-survival paying jobs, which will force employers to pay more in order to attract employees. ”

    I’ve never heard this argument from Austrians before, but I’ll let someone else confirm whether it’s a true argument or not. Is he really saying minimum wage workers would be literally dying on the streets without public assistance? I am skeptical.

    4) The minimum wage causes unemployment. It hurts the very workers it’s supposed to help. Is it easier to live off of $7.25/hr or $0.00/hr? Employers will not necessarily hire workers if they must pay them higher wages. They certainly will not if it is not profitable. They can use labor-saving technology instead.

    If there is no public assistance, no minimum wage, no government causes of the business cycle, and no government restriction of competition, it is clear that worker’s wages will tend toward their productivity, and real wages will rise over time as the economy grows.


    If we accept the premise of his argument that “we agree that children should not starve” then the libertarian solution of private charity will work to take care of the problem of the poor as best as it can be taken care of in a world of scarcity. This was, more or less, how America was before the welfare state. He should read de Tocqueville’s book, Democracy in America or Marvin Olasky’s book, The Tragedy of American Compassion.

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