Does this guy ever do anything other than make dumb assertions? Scarcity exists, like it or not. Profit is realized when revenues exceed costs. What an idiot.
No scarcity? Yee-ha! Then there’s no reason to have an economy. We can all sit at home awash in our excess resources… [;)]
This guy clearly has no idea how ‘scarcity’ is defined economically, and is simply going by a common usage of the term.
Ask your friends how they’d feel about minimum prices. I mean after all, if we’re all having to fork over more money for food it means Kroger can afford to hire more people.
If I understand you correctly, you’re saying that the economy only functions well (“optimal distribution”) under a perfectly symmetric (mean=median with no outliers) distribution of wages. That is an impossible situation in the modern economy, however, as wages are an “extremistan” character (cf. Nassim Taleb) and thus by definition skewed in distribution.
Also, it’s a bit unclear how much marginal productivity is being factored into your calculations here, if at all, despite its being the only real determinant of wages. This model also seems to be a bit ceteris paribus in changing one variable and holding the others constant, regardless of the compensatory adjustments that would be made in a real economy if such changes were to occur.
Here is what he said in response:
">If I understand you correctly, you’re saying that the economy only functions well (“optimal distribution”) under a perfectly symmetric (mean=median with no outliers) distribution of wages.<
The economy functions quite well as is. It is far far far below optimum performance
Also, it’s a bit unclear how much marginal productivity is being factored into your calculations here<
It’s too bad you refuse to read more of what I’ve been telling Nathan. Prices are determined partly on cost and partly on marketability. The notion of marginal productivity demands that the cost (wage) is determined by product price. This is a cause/effect reversal that is quite the norm in conventional economics."
Why not invite your friend here? I’m sure many would be more than willing to dispel the nonsense he believes in.
Xevec, this response is not specific and is not intended for your debating friend.
I dont see the need for special economics knowledge to answer this minimum wage question. It’s very difficult to succeed in business. The cost of doing business is increased for many, many employers when the minimum wage is raised. Of those many employers, some will likely choose to reduce this new cost by laying off some marginally productive employees. Whys that a complicated idea? Just because someone wishes to convolute it with economic terminology, charts, graphs and tortured thinking, this simple FACT OF LIFE is not changed!
It’s difficult to successfully run a business (based on the failure rate)
Add to this difficulty, an increase in the cost of doing business (a coercive increase)
Businesses consider many options when getting closer to failure
One of the biggest costs for most employers is personnel cost
Costs will be examined to avoid a loss, especially large category costs, e.g., wages
Out of the extremely large number number of businesses affected by min. wage laws, it’s basically guaranteed some will reduce personnel costs via a layoff
Economics involves trying to get things from this world at the lowest cost possible. Man can do this by sifting thru a vast array of tools that’ll allow him to ascertain these things, things worth more than the cost of the tools themselves. One of these tools would include his fellow-man. How can raising the cost of that tool, in a way that has no real relation to it’s true cost, help man to ascertain these things from the world? Why would adding to the burden of extracting goodness from this Earth be beneficial? It’d be like arguing for funeral homes because people are living longer. Should man have the burden of dying sooner to benefit the mortician? Leave us alone!!! [:@]
Could your friend explain this cost-marketability thesis in a bit more detail?
The Austrian theory of price determination is based on double inequality of valuations, i.e., the seller values what he is receiving (money) over what he is giving up (good in question or labor services), while the buyer values what he is receiving (good in question or labor services) over what he is giving up (money). In a way, cost and marketability are another way of seeing some aspects of this: cost of production affects the seller’s valuation of the good in question, while marketability is a way to measure sellers’ valuations in aggregate. It seems to me, however, that by viewing prices through a cost-marketability paradigm ignores a large part of the process.
Well, he said scarcity is not a factor. Simply distribution is for products. But doesn’t speaking of distribution assume scarcity?
It does. To take air as an example: it is absurd to speak of distributing air except in the cases of undersea divers and astronauts, as air is not scarce except in those situations.
Well, couldn’t he use the examples of air pumped into tires…as well as canned air(the stuff used to clean keyboards?) I gave him the benefit of the doubt with those products, but it still demonstrates scarcity, because of the material used to create such products.
Well, yes, those are more exceptions. The point is, air for breathing, for healthy people on land, is not scarce in the economic sense: for all practical purposes, the amount of immediately breathable air is infinite, and thus it is absurd to distribute it.
Oxygen tanks for use by divers, astronauts and people with respiratory problems are scarce, because they require production to be converted into a usable form; the same with compressed air for tires, keyboards, etc. When production is required to transform a good into usable form, the resulting usable good is scarce by definition.
To use another example: For a normal person at a beach or in a (sandy) desert, sand is not scarce. One wouldn’t distribute sand to people in those situations. Sand, however, is scarce in other places, because of transportation; likewise, even at our beach or our desert, glass is scarce, as production is needed to transform it into glass.
Whats the purpose of prices? Why is a piece of bubble gum 5 cents and the stuff Russia sales to Iraq to fuel their nukes virtually priceless? (forgot what its called. some version of uranium, right?)
Also, my time is scarce. If I’m lucky, I might live 80 yrs. Compare 80 yrs of existence to that of the universe’s yrs in existence. Since my time on earth is limited, I would say my particular human capital is scrace. Every second of my life is priceless, in my mind. But objectively, others will value it a little less than I do. To say scarcity does not exist or is not a problem, is to say we are gods, omnipotent ones in case you’re wondering.
To him, prices serve two purposes.
“Prices are determined partly on cost and partly on marketability. The notion of marginal productivity demands that the cost (wage) is determined by product price. This is a cause/effect reversal that is quite the norm in conventional economics.”"
This is what he believes how prices are determined.
Prices are determined on the one hand by consumer valuation and on the other by sellers judging the case to be one in which it is worth their while to provide a good (keep in mind: costs are opportunity costs, i.e. they’re expressed in terms of alternative possible ventures foregone.) Prices are formed where the two meet. Neoclassical theory does not differ on this, much anyway. Dr Reisman has argued that cost plays a part in price formation, but not in a way incompatible with the marginal-utility and subjective theories of value.
A factor receives its marginal product as a reward in competitive factor markets, because any employer under-paying will simply chase away prospective job-seekers; likewise, any factor overpricing itself (or being overpriced) will dissuade potential employers from utilizing it.
Nobody except the small business owner seems to have any problem with raising the minimum wage. The minimum wage recently increased from $5.15 per hour to $6.50 per hour in the state of Missouri by a 72% majority vote! It seems that very few understand the negative repercussions of artificially inflating wages. It is truly no surprise that it is easy to get minimum wage increase passed because the benefits are very easy to understand and the damages are very complex and difficult to see. It goes right back to our national tendency to look at the near-term effects and blissfully ignore the long-term effects of what we do.
People vote to increase the minimum wage because the political realm tells of all the poor men and women that are unable to provide for their families because they are working at a fast food restaurant that doesn’t pay them enough. They say it takes more money from the rich and gives it to the poor, like that is a good thing. And I’m poor, so I have no private motivation for making such a statement.
Before we get too deep into this issue of minimum wage standards, it is important to establish an understanding of wages to begin with. Very simply, wages are the current price of labor. And price is decided by the simple but profound economic principles of supply and demand. In a free market, the higher the supply, the lower the price of the product or service, and vice versa; the higher the demand, the higher the price, and vice versa. Ultimately, these two principles combined make up the economic law of Scarcity, which states that the less there is of a good relative to the demand for that good, the more it will cost; in other words, the more scarce something is, the more it costs, and the less scarce it is, the cheaper it is. That means that if the market were allowed to set wages freely, wages would be very high or very low depending solely on the supply and demand of labor at any given time.
But the government is renowned for its practice of artificially making changes to the market, telling it what it ought to do, and therein lies the destructive flaw of minimum wage standards. The consequences of strong-arming the market are always bad in the long run and difficult, if not impossible, to avoid. The short-term consequences of minimum wage standards validate everyone’s decision to vote in favor of it. Entry-level employees are now better able to feed and shelter themselves and their families and, theoretically at least, require less government welfare assistance.
The long-term effects of artificially setting a minimum wage standard are numerous and self-defeating. For one, businesses will have less profit, and therefore will be less able to expand their business; expansion of business increases labor demand, which would, in turn, increase the price of labor (aka wages). That is the market’s natural way of increasing wages, but it doesn’t happen all at once; it is a slow process, and the politicians need votes now, so they artificially amend the market in order to present the appearance of care, but with the ultimate selfish goal of garnering more votes (or they are just economically ignorant).
A corollary to this first negative long-term effect is that some businesses are unable to maintain a profit with the higher wages; this is particularly true during slow economic periods. Those businesses will fail, and everyone in the company will lose their jobs, increasing unemployment, which increases the supply of labor, which decrease the price of labor (aka wages). While I would characterize this as the least of all negative effects, it is still a problem.
The second long-term effect of establishing a minimum wage standard is that the price of goods will simply react by increasing. Every step of the production process of a good has a cost associated with it. If one of those steps has an increased cost, the final good will also have an increased cost in the market. The result is that minimum wage standards are purely inflationary; they increase the cost of a good or service without a corresponding increase in value, which is a core cause of inflation. Another way to say it is that they decrease the quantity able to be purchased with a unit of money without a corresponding increase in the value of that lesser quantity. In the end, minimum wage standards accomplish nothing positive because the absorptions of the increased cost of goods that is caused by minimum wage standards, whether it be through direct increases in the price of goods or through decreased profit by the producer, are proportionate to the increase in wages received by laborers; hence, the value of the money they receive is decreased exactly enough to balance the increase in money supply. Mark these words very clearly: The market will always balance itself back out; therefore, any attempt to artificially change her will come to naught or worse.
So, minimum wage standards slow the growth of businesses, increase unemployment rates, and create inflation, which ultimately renders it completely useless. Could it possibly do any more harm? You betcha.
Possibly the greatest harm that minimum wage standards do to an economy is that they nullify all of the benefits of allowing the market to freely set the price of labor. So, with that understanding, I will continue to list the consequences of allowing the market to freely set the price of labor, many of which are simply the contraries to the harms of artificially setting the minimum price of labor. Remember, all of the following benefits are nullified by minimum wage standards.
The first benefit of a free labor market is that the price of all labor would be directly proportionate to the productivity of that labor. So, if you are adding a great deal of value to the goods of a company, you will be compensated well, and if you do not add a great deal of value to the goods of a company, you will not be compensated well. There are a number of corollary benefits to this fact.
First, unskilled labor would no longer be protected. While that is construed as a bad thing by politicians because a large portion of constituents are unskilled, it is, in fact, a very positive thing. This would heavily motivate unskilled, less productive laborers to become more skilled and more productive because they would only get higher compensation by being more productive, and the only way they could become more productive is by becoming more educated and/or more skilled. So, a free labor market would heavily improve the quality of labor, thereby increasing the productivity of the market, thereby increasing the value of the economy’s money supply.
Second, a free labor market would allow individuals to join the labor market earlier. While I am not in favor of forced child labor, I am in favor of giving youth the choice to join the labor market and start becoming educated and skilled on the job, which is, in most cases, the best way to become educated and skilled. In other words, I think we should protect children against the requirement to work at a young age, but I do not think we should make it impossible for the market to invite young aspiring laborers by setting a minimum wage standard above their value. If laborers started working at a younger age, they would learn to be more productive earlier, and so would not struggle with the ability to feed and shelter themselves and their families. I started working in my father’s auto mechanic shop when I was six, and I didn’t always like it, but I learned the discipline of work while there, and therein lies the benefit of allowing citizens to enter the labor market earlier. They won’t get paid very much because they will start out being very unproductive, but they will learn and grow, and as they do so, they will be rewarded by increased income. Naturally, some employers will choose not to reward increased productivity, but according to the balancing law of the market, employees of those employers will transfer to other employers that reward justly. Once again, the market maintains balance as it always does.
A corollary of a younger workforce is that there will be greater productivity in this economy due to an increased number of laborers. Also, because laborers will begin to learn how to be more productive earlier, the total labor market will increase in quality, which will further increase productivity, which will further increase the value of our money supply, as productivity is the only true increasing agent of money supply value.
And yet another corollary to this younger insertion of laborers is that the transition into the labor market would be incredibly simple because laborers would not be required to instantaneously contribute productively enough to justify income sufficent for subsistence. As it is right now, it is very difficult and sometimes impossible for unskilled laborers to enter the labor market because they cannot instantaneously perform to the level that is required by the minimum wage standard.
The government has actually begun to medicate many of the undesirable byproduct symptoms of the original medication of minimum wage standards, which medicated the symptom of poverty. The first and foremost effort, of course, is welfare and socialistic entitlement programs of every sort. I have even run into a grant program is actually paying young “disadvantaged” individuals to work for businesses at no cost to the business! The system is terrible for taxpayers and the labor market and the government and the economy in general.
The greatest difficulty with this problem, and problems like it, is that it is so well-developed at this point in time that removing it in one fell stroke would have strong and painful repercussions. It must be done in phases. Drop the minimum wage a dollar at a time or so. It will still be painful, but it will feel like a long, dull pain rather than an aneurism. People will not have the money to buy a nice juicy steak every week, but they won’t be dying in the streets from hunger either. Unfortunately, it takes a long time to unwind all of the tension that has been built up in our economy from political administration after political administration deferring the pain of curing the issues caused by previous administrations, thus exacerbating the problems by ignoring them or even playing to them, and, many times, exacerbating the problem by adding new issues to the already heavy load in order to deliver instant gratification to the willfully ignorant constituency, securing voting support for the next election. It’s all a game to politicians, and in their game of politics, money, and power, the constituency always loses.
Can someone make sense of this…because I can’t:
Less cash buying the same goods = deflation.<
Yes, but YOU aren’t using less cash. With higher velocity you are using the same cash more often which equals more cash. The cash supply equals the quantity times the velocity. The higher the velocity the larger the supply. The system NEEDS less cash, but MORE cash is being USED!
Needing less money does not deteriorate its value. <
Are you not able to differentiate the words ‘need’, ‘have’, and ‘use’. Your mental block on this is really starting to aggravate me. I mean, being stupid is a common human trait, but are you glorying in it? Or are you feigning it just to annoy? Think boy, think! Jeez!
Instead of having to use 10 $1 bills to buy a product, and now needing 5 $1 bills to buy the product.<
Its more like you had 10 in the past, and spent it on the product. Now you have 20, which is more than you need, and having more money than you need tends to push the product price up. Needing less money in the system does not mean that the prices have gone down.
It is nearly impossible to determine the origins and all of the factors…<
So. We are not trying to trace every profit and every wage along the way to consumption. You haven’t answered my question. What’s your point? You pointed out that thousands and millions of wages are incorporated into the price of the product. I agree. But for every wage component there is probably also a profit component. You want to dispute this??? Fine! But why can’t you disclose your point??? When you’re losing, change the subject again???
Nope, water is scarce. That is why there are prices. Marketing of water did not create the prices of water.<
And you accuse me of denying reality!
If people truly believed water was not scarce..they could easily ignore the “marketing of water.”<
How can they help but know water is plentiful. They literally flush it down the toilette every day! Un-bottled watter is available anytime and anywhere to anyone in America. Prices on bottled water is not affected by a lack of scarcity.
Personally, I believe you would claim that future consumption is worse than current consumption.<
Why don’t you ask questions rather than guessing at what I might think? Or rather, why don’t you read what I’ve already told you?? Savings means nothing to the macro. And if you mean savings, why don’t you call it savings, rather than adopt a term that some idiot economist has coined.
I do, but cost can mean so many things. You can be talking about anything here.<
There is a difference between cost and price. Your original question states that either you are ignorant, or that you are certain that I am ignorant. So either you are stupid or mean spirited. Which is it?
It raises all companies wages unilaterally.<
Oh, yeah, ok. Forget I asked.
When I say that a company cannot raise wages unilaterally, I mean that it cannot ignore the actions of its competitors. It cannot raise wages by itself, but only in harmony with the other employers. The context should have made such explanation redundant, but I expect more intelligence from you than you are willing to reveal.
The Austrian theory of price determination is based on double inequality of valuations,
I don’t have any problem with the concept as explained. The problem I have with your concept, Nathan, is that you see a too firm a connection between cost and price.
The problem is, you don’t know what economists mean when they speak of “scarcity.”<
The problem is that you repeatedly accuse me of not knowing what I am talking about, and it takes months of banter before you concede on any point. This would go much faster if you could approach me with an attitude that assumed that I do know what I am talking about, and you just need to understand me.
There is this sort of notion you create with this statement that buying more with the same dollar causes inflation.<
You cannot buy more with the same dollar, but the same dollar circles through the economy and back to your pocket faster. You have this intransigent concept that higher velocity means lower prices. NO! Higher velocity means higher prices. Higher velocity means you spend more, but then you earn more.
I don’t think you understand what you are saying here.<
Again, insulting, unwarranted, non-contributing. Would you please make an effort to remove this statement from your posts.
And higher prices OBVIOUSLY means you need more money to buy goods.<
You keep thinking micro. That individuals ‘need’ more money is a symptom of them HAVING more money. The system needing less money is a symptom of it having too much.
Since my time on earth is limited, I would say my particular human capital is scarce.<
Your time is limited. Your time is not scarce.
Oh yes Allan, the guys from the mises forums ask why don’t you come over there?<
You’ve only linked it once, and I can’t remember where. At the time I wasn’t interested. Have you linked here there?
And believe me, some of these guys are brighter than some of the writers they have on the mises staff.<
Oh, isn’t that an endorsement
The lines in <> come from me. Everything else comes from him.
Xevec,
Whoever it is that you are speaking to here is feeling personally attacked and insulted, which does not lead to a positive environment of mutual pursuit of truth. The author seems to be striving to find points upon which to disagree with you, which is typical of defense. The truth is, I think there is a lot more agreement between you two than Allan (?) would like to admit. Much of the opposition is due to misunderstanding, I think, not theory variance. But I could be wrong about that; it’s hard to tell with the obfuscation of the theory within the mess of self-preservational defense.
With that said, his concept of the velocity of money being equally important to the quantity of money in the market is a good point and should be considered when discussing inflation. However, I do not know if I understand his statement of theory well enough to criticize or endorse the different elements in it. As I said, it is so obfuscated that it is difficult to clearly make out the basic theory Allan is advocating
Based on my interpretation of what he is saying, I think there is at least one practical addition that is relevant: While the theory of increased velocity of exchange being inflationary to all commodities, including labor, is accurate, the practicality of the matter is that when the economy begins to contract and the supply of money wanes, the aggregate velocity/supply product (hereafter “V/S product”) of money drops as consumers and businesses become much more wary of making purchases and the market gets into “survival mode.” While there are fewer money units in circulation, which naturally increase the velocity of circulation, the decrease in supply necessarily outweighs the increase in velocity, considering that is mandatory for an economic contraction to occur.
So, while in theory, $100 circulated 10 times (V/S product = 1,000) in a year has the same inflation/deflation ratio as a $1,000 circulated one time (V/S product = 1,000) in a year, one cannot assume that if the supply of money drops from $1,000 to $100 due to economic contraction that there will be a corresponding proportionate increase in the velocity. For an economy to contract, the V/S product must decrease. Likewise, in an economic expansion, the V/S product must increase.
I don’t know if this opposes what Allan was saying, but it is an important practical addition to the theory regardless of whether it is oppositional.
While I do not appreciate his mode of communication, I would like to thank Allan for bringing the velocity of exchange aspect of inflation theory to my attention; before this, I was aware of it, though not presently conscious of its implications, which forced me to think it through and truly understand it. I’m curious where that theory originated so I might do further research on it.
I don’t know if this opposes what Allan was saying<
Nathan is under the impression that economic growth can occur without any inflation. Why I started on velocity was to point out that increased economic activity will feed inflation regardless the grip on the quantity supply; this on top of the fact that increased economic activity tends to automatically encourage the local bank to expand the quantity supply.
On the flip side, any price deterioration clearly illuminates an impending meltdown, for as economic activity shrinks, so too will the local bank shrink its own liability, and as the money market tightens, the velocity too will tend to fall off, exasperating the problems.
I’m curious where that theory originated so I might do further research on it.<
My understanding is of my own making. I took economics in business college 33 years ago, and over the next few years was extremely bothered by some correlations that I could not make sense of with the causal theories I had been given. After a decade or so I suddenly realized that much of what I had been taught was completely backwards, and over the next two decades with self study and arguments like this, I have come to the understanding that I have today. Pretty much all that I understand today I have given to Nathan over the last year or so, but it is so hard to get him to concede a single point. http://www.facebook.com/group.php?gid=2207846194
The book that I wrote is getting rather dated as my understanding continues to expand and reinforce itself. http://www.lulu.com/arman
And price is decided by the simple but profound economic principles of supply and demand.<
No it is not so simple. The wage is the foundation of the consumer dollar, and the consumer dollar is the basis for all business activity. In effect, the wage creates its own demand. On the other hand, normal market forces are always putting downward pressure on the product of labor, and therefore the price of labor. All things being equal, without a crutch to the wage of some kind, it will shrink, and with its shrinkage, so too will the consumer dollar and the demand for labor services. The various state minimum wages were outlawed in the courts in 1924. The following years, prices were almost completely stable while I believe that wages were deteriorating. Then it became apparent that expectations of consumer dollars were wholly unfounded and the economy melted away. The NRA provided some wage support in 1933 and the economic slide immediately turned into a strong growth. These measures were again tossed out through the courts in 1935 and 2 years later the economy was in another tailspin. Then the NLSA was enacted in 1938 and the economy has never really looked back.
Your faith in the free market might well seem rational, but is without historical merit.