[ksrugis]

A liberal friend of mine often argues that wages should be arbitrarily raised to “a living wage” and this will actually save the economy because people will have more money to spend on stuff, which will in turn be good for all those businesses who had to raise wages. I’ve always argued that you can’t set wages arbitrarily and that they are linked to the value of what you produce etc. But I’m thinking of trying to explain it from a different angle: Say Wonka (using him as a substitute for the whole of businesses in an economy) doubles the pay of his workers. Now they have more money to buy his candy, which makes his business even more successful. Everyone is richer, right? Well, since there is excess demand for candy, but not excess production, the price of candy is merely bid up. They don’t actually gain more candy than they otherwise would have had before their wage increases. Am I right? Can I take this further? Thanks.

[porphyrogenitus]

Well Hoover tried a mild version of that (a high-wage policy on the basis that it would lead to purchasing power which would lead to growth). Basically the main output of such a policy is unemployment, soup lines, and shanty towns set up in parks.

I should be less flippant because there is a superficial plausibility of such reasoning, which means its perennially attractive to noobs. But in order for it to “work” he would also have to mandate employment somehow, so that marginal workers won’t become dis-employed. And if he did mandate employment by such a means, yes, there would be other dislocations – so he would have to implement price policies. Price policies would lead to further dislocations, including probably shortages (even though one would think output would be higher since everyone is employed, this is not the case when dislocations start wreaking havoc in the system; productivity would end up declining. Note productivity declines is a explicit aspect of certain versions of crude Keynsian full-employment policies, such as Keynes’ own example of paying people to dig holes and fill them up again. The net productivity – output – of such jobs is 0. Actually it’s negative because of depreciation of shovels, work clothes, and land through repeated hole-digging-and-backfilling).

Basically it does sound like one of those schemes to inflate your way to prosperity; I mean, the reducto ad absurdum is why stop at a “living wage”? Why not just vote ourselves rich, then output will really soar, amirite?

Anyhow, here’s Gary North on a somewhat similar scheme, the Social Credit movement, which is at the root of a lot of these modern variants.

[miljacic]

This is how I see it… to keep things extremely simple lets assume that nothing else changes but one company’s wages and the amount of products. It’s a gross oversimplification, a toy model, but still useful (I think).

One part of company’s money goes into making stuff, the other goes to wages to buy stuff.

[The rest of the money goes to savings but in this simple model that doesn’t change either so we’ll ignore it.]

If you artificially increase wages that means you have less money to make stuff. So yes, Wonka’s workers will have more money and will come to him to buy candy but there will be no candy because it couldn’t have been made. Society has less candy.

We could also think of the extreme case, resulting in immediate arrest of activity: ALL the money goes to wages and nothing is ever made.

This is for Wonka being a single company. If you want Wonka to stand for ALL the companies in a country at the same time, then it’s hard for me to distinguish between money for wages and money for production, because everything is someone’s wage.. if a particular company spends money into production that is actually wages for workers in other companies… if Wonka wants to make more candy it has to buy sugar so that’s wages to sugar-factory and truck-company workers. In that case, increasing wages for ALL these workers simply means disturbing the cooperation between companies – truck company won’t have trucks because it gave it money to its worker’s wages, sugar company will have no sugar etc etc.

All I wrote here is too simplistic, but you asked for something quick and easy to snap back at your liberal friend… who cannot see that if you increase the wages artificially that money has to come from somewhere else where it has a serious, important role to play and you can’t just take it away. The effect is, in the long run, you hurt and distort and confuse the production and society ends up with less.

[ksrugis]

Ok thanks for the replies. A follow-up: I have also talked to him about zero sum economics, in that he believes there is a given amount of wealth in the world, and the top 1% are taking it away from the rest. So if we have a pie representing wealth, he doesn’t believe we can bake more pies (i.e. create more wealth), we can only divide it up. His view seems to mesh well with what you are saying though, in that if you put money into wages, you are at the same time taking it out of production. So how does our view that we can create wealth fit in here?

[ksrugis]

on second thought, perhaps the only thing that matters is that we are talking about monetary wages, and wealth is more than just money. So new products are = to new wealth, like Bill Gates created windows software which added to our wealth as a society?

[miljacic]

sorengaard, you wanted something simple so the model I put up was for the purpose of simplicity.. a “toy model”, meaning that it omits many aspects of reality and just focuses on some aspects.

The zero sum is connected with the savings aspect, the one I mentioned to be ignored in the model, so yes, the model corresponds to zero sum. If you want to break out of zero sum game you have to save, and then use that saving to create a new, improved reality.

If economy is nothing but zero sum game then here’s the question: how come anything was ever created? How come we are not living anymore like prehistoric people? If it was zero-sum, we’d still be like that, nothing new would happen. Even before that, how come we became people and are not bacteria anymore, if it was all zero-sum? Even before that, how come bacteria is not a cosmic dust anymore?

Obviously, we world evolves and changes all the time, so zero-sum is just one part of economic reality, and not a very happy part when it happens… for example, work of a thief is a zero sum game: a thief plus a legitimate owner have the same total amount of wealth before and after the theft.

Anyway, without saving everything gets stuck as it is. And sure, money is mostly just a bookkeeping device of all this progress… I think that theoretically, a particular society could progress from a prehistoric stage to todays stage with its money supply being totally constant, one and the same. Underneath all the flow of the numerically same amount of money, the society would slowly grow, improve in every way, have more babies, etc etc… using one day’s savings (unconsumed products) as the basis for creating something new the next day.

[ksrugis]

So if I laid out a simplistic model for him to look at, say Wonka’s factory, I could break it down to: Wonka spends on production + wages, and Wonka Saves. When the wages increase, production and savings decrease. So we end up poorer than if wages were linked only to production.

[derosa8]

Don’t disregard Porphy’s original response. If wages were doubled by law, the immediate result would be increased unemployment. Workers who are not worth the doubled wage the employer would be forced to pay would be fired. That’s one of the best ways to combat “living wage” arguments, since it is much better to have a “non-living” wage than to be unemployed with no wage at all.

[ksrugis]

I’ve told him that before JohnD, but his exact response is this: Businesses always employ the people they need to employ to get the job done. So if a candy shop needs 5 people to operate, it will have hired 5 people. I said to him that certain positions are eliminated and other employees end up taking on those tasks, example: I worked in a nursing home doing payroll and payables after college. When I left, they did not replace me, but hired a part time person to do payables and had another accountant there do payroll on top of her other work.

[derosa8]

“Businesses always employ the people they need to employ to get the job done.” – That is not a meaningful response. In fact, it is contradicted by just about any business you can think of. Think of any factory, school, hair salon, restaurant, an electric company, investment bank, landscapers, etc. Immediately, you can think of a practical way of firing employees and redistributing their tasks. Or, if their tasks were non-essential the business may eliminate them altogether. Just think how many people have basic jobs working cash registers, filing papers, answering phones, cleaning, and taking out garbage. Would it really be impossible for businesses to continue operating if they had to fire a few of each?

The bottom line is this [which it sounds like you have already mentioned to your friend]: Businesses are not charities. They will NOT employ workers that cost more in wages than they contribute to the production/service. Granted, sometimes it is difficult to measure how much in dollars an assembly line worker contributes to the final product, but that is the job of entrepreneurs to estimate what is called the marginal revenue product of their employees. There is no doubt that employee wages will tend toward their marginal revenue product in an unhampered market. I can explain that further if necessary. Also, search for the minimum wage thread in the Austrian Economics discussion forum because that is where I learned a lot of the mechanics of this issue.

Here is a good video of one example:
http://learnliberty.org/videos/does-minimum-wage-hurt-workers

[porphyrogenitus]

Since it’s evident you’ve gone around and around with him on this point before, I think the key problem may be that your friend has many faulty premises, so focusing on directly rebutting this one line of reasoning – which is a conclusion he derives from his faulty premises – will never succeed.

He needs to have the underlaying premises that lead him to the conclusion that “duh, it’s a simple matter to just mandate everyone be paid a living wage, then people will be able to buy more, and the companies themselves will prosper even more than they do now, I [he] can’t understand why they don’t see it’s in their own self-interest to just do it, so, gosh darn, we’ll just have to force them to do it, then later they’ll thank us.”

As if he’s the only guy, or only the current modern progressive movement, has ever thought of it, it’s never been tried anywhere, but if they can just implement it then the greedy business owner’s noses will be rubbed in how well this works, and everyone will be better off.

Well, anyhow, you’ll have to find out what the key underlaying premises are, and show how they’re wrong or incomplete (often times the problem is incompleteness – leaving out a key factor causes people to reach incorrect conclusions).

Hopefully Tom will also chime in; I’d also recommend you re-post your question to the Austrian Economics sub-forum, with a link to this discussion, and Jeffrey Herbner will be more likely to see it, too.

Anyhow I’m reminded of something I heard that Rothbard wrote, in reaction to the argument that businesses pass on costs to consumers. He argued they can’t – at least not all of them. So they end up “eating” the cost of, say, regulations and mandates. Or at least much of it. BUT – and it’s the key but – this then means that many of them will fail. They’ll stop being viable and have to cut back or close shop. Your friend seems to be stuck in a sort of equilibrium mindset that the basic structure of an economy is “fixed,” so that if you change one variable, it only has the intended effects: increase wages by a lot, the capital structure remains the same, consumers demand more output, more output is produced, and living standards go up. However this would not happen, because much of the current economic structure would become unviable, plants and businesses would close, overall output would drop.

I’ve heard several times people used to say during the Great Depression that it wasn’t so bad as long as you had a job. That saying reflected the consequence of Depression-era wage-policies, starting with Hoover then redoubling under FDR (who put in place a lot of programs and legislation – including labour law – intended to keep wages up and drive them even higher). Sure, if you had the job, you would do well (enough) under such a policy. But it disemployed a lot of people. . .and thus, as a result – the unseen part became that, over time, as the years went by, even the people whose wages were artificially boosted were, in reality, worse-off than they would have been if such policies hadn’t been implemented, because the effects of an economy that was poorer overall ended up hitting them, and what was available to them.

Note also that even when Hoover & FDR implemented these “high wage” policies, they also implemented “price-support” policies. Again Hoover took measures to keep prices from falling, and FDR made them even stronger – to the point of sending people to gaol for selling below the government-mandated minimum price. FDR also destroyed perfectly good output (mostly agricultural) at a time people were going hungry (in the “for-real” sense, not the modern sense), in order to keep prices higher. Why? Because producers needed higher prices in order to maintain the wage levels at the artificially high rate. Of course, this also meant less output sold.

So my little story, in my initial post, was not a theoretical exercise: and it means people aren’t actually better off, at least on the whole, though some subsets (usually influential people or politically useful groups) are made relatively (key word there) better off at the expense of the majority (of both workers & firms). This also means that the policy-maker who implements such rackets can easily point to examples and say “see? My policy is working. Look how well x plant and y workers are doing?” – thus continuing to make this reasoning plausible to noobs (re-election, baby!), and the resulting dislocations and disemployment are blamed on some scapegoat.

(Note that not every policy-maker runs this explicitly as a racket. To take two contemporary examples, I bet that both Harry Reid and Nancy Pelosi are both simpleminded enough to be sincere believers in thinking “yeah, if only it were politically possible.” Guys like Barney Frank & Charlie Rangel otoh, aren’t too simpleminded. They’re intelligent brazen grifters).

[ksrugis]

Wow, very excellent responses. Thanks so much. I’ll have to probe his mind some more to find out what/where he is missing information or having faulty premises. He definitely thinks FDR is the savior of the nation, so talking to him about these high wage policies should be interesting. I never picked up on any kind of intelligence when hearing Rangel speak, but that could just be me LOL!

[porphyrogenitus]

You’re welcome and I hope they help. Two further avenues of approach:

First, since he sees FDR as the savior, mine this site’s lectures on both Hoover and the New Deal. Then check out Mises.org for stuff on both Hoover & the New Deal. Check out the Mises Media Youtube channel for videos on both, also (there are several of them, since this is a perennial topic, and the “go-to” historical episode for American progressives of all varieties). There’s also Bob Murphy’s book, you can give it to him for Christmas. You can also give him Rothbard’s “America’s Great Depression” for free as a download.

When discussing this with him, start out by focusing on what Hoover actually did (you can get to the Federal Reserve later). Don’t go straight at talking about FDR. There are two reasons for this.

1) They often believe Hoover caused or at least exacerbated the Great Depression. This is true, but not in the way they think he did. Talk about his actual policies. IMO this is a great chart, of unemployment and events. Note that after the ’29 stock market crash, unemployment got almost to 10%. . .but then it started drifting lower, till it was back down to ~6%. Then Hoover’s interventionist policies started kicking in, and it soared.

2) Focusing on Hoover initially will help delay ideological defensiveness (if you focus primarily on FDR, even if he doesn’t say this he’ll probably be thinking “he’s just an FDR hater because he’s a right-winger”). Discuss Hoover’s policies as what they were: antecedents of the New Deal, FDR as a continuer and extender of those policies, rather than representing a break with them. (For bonus credit you can tie this into our contemporary experience, where Obama constantly says he wants “a sharp break with the failed policies of the past” but then, when questioned on any policy, always points out – accurately – that he’s not doing anything different from what his predecessor did, he’s just following through on the policies and enlarging their scope. I.E. Bush had his stimulus, and Obama turned his to 11. Bush had his bailouts, and Obama turned his to 11. Bush had his prescription drug benefit, and Obama turned Obamacare to 11. But keep the focus on the 20s/30s, just illustrating contemporary examples).

Now so far we’ve been focusing on the “these policies won’t have the intended effect” argument, which is a worthy one. But there’s also the argument “who decides what constitutes a ‘living wage,’ who decides how best to get it, and who decides who really needs one? For example, teenagers starting their first part-time job probably aren’t looking for a job that will feed a family of four, they need a job that will help them get some spending cash and acquire the job skills that will be useful to them in the future when, as adults, they want a job that will feed a family of four.”

To that end, I recommend Thomas Sowell’s books, especially “Basic Economics,” and also some of Tom Woods’ books. “The Church and the Market” covers this “living wage” argument in one of the early chapters, but I think he also brings it up in some of his more recent books. One of his favorite points is that “you don’t improve the lot of the poor by taking away the option they actually choose.”

So what does this guy want? Does he want a Federally mandated “living wage?” What will that level be? Will it vary by region, because cost of living varies by region? So will there be a whole schedule of wage minimums – perhaps one for each County in the U.S. – detailing this? Now, how will that improve the lot of, say, the poor immigrant. Noting that this is one instance where the experience of immigrants serve as a perfect example: over decades, generations, a century or more – going back to before there was any Federal minimum wage laws at all, much less “living wage” laws, and indeed from the present to the past where Federal Courts were striking down state minimum wage laws, immigrants have come into this country and started out by taking jobs at wages Americans consider low-paying. And not only did they live on those wages, but they often managed to send money home to their relatives on those wages. Not only did they manage to both live on those wages and send money home to their relatives on those wages, but they managed to save additional money, and eventually open their own business. Or they managed to live on those wages, send money home to relatives on those wages, but also get education or training despite working long hours so that they could get better jobs. (Thomas Sowell covers this quite well in a number of his books. I think – I’m pretty sure – he discusses it in “Basic Economics,” and I also think it’s in “Intellectuals and Society” – one of Sowell’s main points, repeated with example after example, is that “caring” progressives often favor policies that make them feel they are helping the poor/least well-off, but the main effects of those policies is to make the progressives feel good about themselves at the actual expense of the ostensible “beneficiaries,” who are not helped at all by the policies, and in many cases are actually hamstrung by them.

Note the word “hamstrung” – I use it because it illustrates the type of harm done: the policies hamper them from moving up on their own, long-term. Thus they remain in the condition of “needing” “help” – and progressives are happy to offer another policy in response to the ill-effects of the first one, then several other policies to counter the ill-effects of the second (none of which are directly connected, by progressives, to being the effects of their own policies), and so on.

Or, to quote apt turn of phrase by Moldbug “The general MO of the Progressive movement in attaining power was to cause problems, then appoint themselves to fix them. There is no better example than the Great Depression, which a few economists are starting to admit was the result of the bubble created by Progressive cheap-money policies under the early Federal Reserve.”

(Btw, that Moldbug post, while long, is a fun read – it rips Yglesias, and by extension, progressives as a whole, and their central fiction of being brave underdogs fighting against “The Man” and “Questioning Authoritah,” and it does it with both substance and style).

[miljacic]

Once I had to reason with a decently smart guy (engineer at a very prominent institution) about minimum wage. It was comical to see how his mind shut off and would not accept elementary reasoning… and how he tried to come up with a bunch of wild and creative excuses and gimmicks until we just had to quit. He kinda got it that what I was saying was kinda… right, but… it just couldn’t be so!

At another time I talked with another very, very intelligent young person (soon getting his technical PhD) about some basic economics and things eventually got totally stuck… and finally I realized, and he said so, that he is absolutely certain that ANY economic exchange between two parties consists of an exploiter and an exploitee. Someone is always exploited and humiliated but has to accept the exchange because… bad living circumstances are forcing him to be used and abused. At this point it was HOPELESS to continue. I was speechless.

And these two cases were not only smart but a very, very nice and genuinely kind people. So… what to say? Is intellectual mind a tool of truth or a tool of falsehood?

Talking economics with someone unprepared is walking barefoot over fire. No matter what you say you’re gonna get it.

[ksrugis]

I think the beauty about the truth is that is can be grasped by all. You don’t have to do mental gymnastics to understand what we’re talking about IMO because it fits so precisely with common sense and your every day experience. Those cases with the engineer and so forth are interesting. I have PhD friends who are beyond liberal, to where I would seriously fear them in a revolution. One wants to forcefully confiscate wealth and redistribute it. She happened to marry my best friend, whose father is a millionaire banker…go figure.

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