I was watching a bunch of the misesmedia videos on youtube, which I highly recommend, and Thomas E Woods made a point about artificially increasing wages.
He said that on the free market, wages increase when the total stock of goods increases because it allows one’s paycheck to be stretched further and further. Okay, I agree.
For this reason, he says that artificially increasing wages via thing like the minimum wage don’t help the common man since there isn’t more stuff for him to buy.
I like this approach, but if a redistribution of wealth caused an increase in nominal wages, wouldn’t the price of consumer goods be bid up and therefore be a signal to entrepreneurs to produce more of those goods? So that resources are diverted from things rich people like (mansions, feraris, vacations) into stuff poor people spend their money on? (rent, food, cars)
Woods seems to be claiming that it is a negative sum game, but as far as I can see it is a zero sum game. Thoughts?
Not everything would go up in price proportionally, or go down in price. There’s also the added cost of the labor itself, which means greater unemployment for some.
Right. I liked Wood’s approach because he didn’t even mention unemployment. He was considering the example, that what if you took all of the rich people’s money and gave it to the poor, what would happen?
By squeezing the rich, you’re also hampering investment and capital accumulation since reasonably they will largely be composed of entrepreneurs operating businesses and buying capital and labour, diverting the same resources to increased consumption, and therefore hampering there abillity to invest . I remember reading a splendid post by Reisman making this point to illustrate the reason why Scandinavian welfare states actually survive for so long is because the corporate income tax is about 20%, compared to a personal income tax of 50%.
Yes I’m aware of these other objections to wealth redistribution. But Woods is claiming that in addition to all these other bad things, you can’t even raise the standard of living for poor people because society isn’t actually producing more of what they consume. What I’m stuck on is that I think that you can get more of what poor people consume because giving them higher nominal wages sends a (false) signal to the market to produce more of those things.
To the extent that poor people have different spending habits then rich people, the structure of production would indeed be different under permanent schemes of wealth redistribution. But in no way does this imply that this structure is more efficient for the poor.
There are a variety of reasons that makes this so. But here is one that you may not have thought of:
To the extent that the spending habits of the “rich” are different from that of the poor,i.e., more “luxurious” or “high end” consumption, it is only due to the fact that they are already satisfied in terms of the more “basic” consumption usually more associated with the poor. By stealing purchasing power from the rich and giving it to the poor, the rich man himself becomes more poor and would be expected to increase his demand for “lower end” goods at the expense of “higher end” goods. In effect, any shift in resources that results from this transfer may not result in any increase in purchasing power for the poor, even in the short term.
I think the presumption is that if rich people bought subarus instead of feraris, yes more subarus would be built but more resources would also be freed up to help other poor people.
(assuming that feraris take up more resources than subarus to manufacture)
Or consider, what if a rich man had 20 butlers who waited on his every need, what if the state came and conscripted them to work in manufacturing consumer goods.
More subarus would be built but only to meet a higher demand for them. It doesn’t follow from this that the poor guy has gained any more purchasing power for the purchase of the subaru since he is now competing with previously ferari customers.
Of course I am ignoring the devestating affects on time preference and incentives. The productive structure is likely to become shorter (less capital intensive) and not longer.
In the short term, abstracting away from subjective valuation/thymology and just considering brute technological facts…the distribution of physical quantities amongst parties is zero sum on a merely numerical accounting (p.s. what is the value of this?).
as time stretches into the longer term, the interventionism will lead to atlas shrugging
Yes but there are more poor people now then before, so those resources must now serve a greater pool of customers. Who’s to say that the end result is more satisfactory from the point of view of helping the poor?
And again, I’m still ignoring the devastating impact on time preference.
@All, I am very aware of the thousands of arguments against wealth redistribution and the minimum wage law. What I am interested in is if there is yet another point against it which Woods makes. Namely that the only way for poor people to increase their standard of living is for more stuff to be produced. He claims that because wealth redistribution does not increase productivity, this does not happen. I am skeptical because assuming no change in total productivity, the resources can still be rearranged in a way that helps poor people (at the expense of rich people, and themselves over the long haul).
So more customers, more resources… the point in confiscating wealth from rich people is that their resources outweigh their forcibly altered consumption, resulting in a ‘positive’ for poor people.
And I say that this reasoning is naive. It doesn’t take into consideration the increase in demand that results from newly added people that result from the shift downward in real income that results from the confiscation. When you subsidize poverty you will get more of it.
In principle you’re right (initially). I was trying to do too much with my example and I think I may have accidentally committed an economic fallacy myself.
Of course, in reality, it is impossible for the government to just transfer the wealth in any efficient and just manner from the rich to the poor, even in the short term.
I understand that, I guess my point is with such a situation the capital needed to even produce more of what poor people are demanding would have largely been extinguished, since those in the best position by far to increase production capacity will have been robbed.