The Choice Illusion

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In the mainstream debate both for and against a free market, one argument that appears continuously is that the free market is predicated upon choice and the ability of the individual to choose. Those in favour will argue that more choice promotes competition and increases the freedom of the individual to meet his ends, and so the increasing of choice and stifling of monopoly wherever it appears is a good thing. Opponents will counter that choice can be wasteful, costly, inefficient and overwhelming particularly when it concerns supply of provisions as basic as water, and, furthermore, that often the appearance of choice is merely an illusion conjured up by private companies that basically operate in a profit-maximising cartel.

Wading into this debate as a libertarian we can see that the basic statements on each side are not incorrect. However they either overlook or misunderstand the true nature of choice in a free society. The kernel of truth in the pro-choice argument is that voluntary behaviour, expressed through choice, leads to market outcomes that provide the most benefit to the consumer. But such an advocacy is formal only – people choose voluntarily not only which suppliers they are willing to patronise, but also the extent of choice itself in a particular industry is the outcome of voluntary action. In some industries, for example, particularly those that are growing and innovative, consumers are willing to support multiple suppliers with a large range of different products and all of these may be viable. We might say that smartphone manufacturing is representative of this kind of industry. In other industries, however, which are perhaps maturing or consolidating and reaching the end of their innovative stage, the benefits to be gained from economies of scale and simple and straightforward products with little differentiation might be what consumers desire. This is particularly true of the supply of commodities where the only differentiation is price and the only benefit to consumer can be reduced costs. This kind of supply naturally lends itself to one or only a bare handful of suppliers and choice in such an environment may be reduced to minor differences in customer service but is otherwise likely to be stressful, wasteful and unnecessary.

However, pro-choice advocates often are not arguing in favour of this formal meaning of choice, but rather they assume and press ahead for a choice that is substantive. In other words, for every single industry there must, necessarily, be several suppliers from which a consumer can choose, however basic the product and however costly the splintered operations. We have already examined the economic fallacies of this belief from the point of view of competition law and the shibboleth that increasing competition is always a boon to the consumer. However, it is also a dangerous ruse that can be used to create nominal or illusive choice while preserving an overarching government monopoly or control that allows government favoured private companies to line their pockets, at the same time allowing all of the blame for the waste and inefficiency to be directed not to the governmental element but to the “free market” vestige of the particular industry. In the UK the privatisation frenzy of the Thatcher and Major governments was often justified by the need to give “choice” and “competition” to the consumer. Britain’s railways for example, are now “privatised” and whenever you board a train there will be a private company’s logo emblazoned on the carriage and you will see front line members of staff wearing uniforms that indicate their representation of these private companies. But the track, stations and signalling are wholly owned by Network Rail, a statutory company that has no shareholders and is under the de facto control of the government. The train operations themselves are not subject to the forces of natural competition but are parcelled out by the government into geographical monopoly franchises to private companies chosen by the government and who, with the government’s blessing, are allowed to operate the franchise for a set number of years before they must retender. This cauldron of public and private activity blended together led to the UK’s railways being judged the worst in Europe from the point of view of cost and efficiency in early 2012. Yet it is “privatisation” and “competition”, those fancy public-facing corporate logos on the timetables and uniforms, that are lumbered with the blame, rather than the government string-pulling. The energy industry is just as bad, if not worse. The electricity infrastructure is owned by National Grid, with six dominant, government-licensed suppliers sending their product through the same wires in what is a ridiculously regulated and cost-heavy sector that is not only seeing rising prices for consumers and talk of fuel poverty but is also on the verge of collapse. Indeed the Soviet-style description of the regulatory framework by Energy UK, the industry’s trade association, only scratches the surface but it is a succinct summary:

The electricity and gas markets are regulated by the Gas and Electricity Markets Authority, operating through the Office of Gas and Electricity Markets (Ofgem). Ofgem’s role is to protect the interest of consumers by promoting competition where appropriate. Ofgem issues companies with licences to carry out activities in the electricity and gas sectors, sets the levels of return which the monopoly networks companies can make, and decides on changes to market rules.1

All of this is before we even go near the odious and destructive high street banking cartel.

Given all of this is, is it any surprise that people lay the blame for poor service, for high costs, for inefficiency, for waste, and for private companies lining their pockets at the door of free marketers’ obsession with choice and competition? Is it any surprise that, not realising that it is the underlying control and forcing of substantive choice to the benefit of its favoured friends in “private” industry, that there are calls for renationalisation of public communications networks and utilities? There is a strong case to be argued, not only from the point of view of its danger to the reputation of the free market but also from that of the level of service offered to consumers, that private companies operating government controlled services is often worse than explicit and outright nationalisation.

As libertarians who cherish the free market our devotion to choice is encapsulated by our commitment to voluntary behaviour and interaction and is only a subset of this wider concept. We do not mean a controlled and enforced, substantive choice in every industry, nor do we mean the illusion of choice created by the government that rips off the consumer and leaves the free market to bear the brunt of their ire. Leave the consumers alone entirely to express their preferences through voluntary action. Leave them alone to determine how much choice they want. Only then will we see industries that are genuinely able to meet the needs of consumers with ranges of products that are suitable to their ends at prices that they are able to afford.

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1http://www.energy-uk.org.uk/energy-industry/the-energy-market.html. Emphasis added.

Social Democracy

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The author responded to a lengthy article, posted online, that advocated strongly social democracy. Unfortunately the original link has broken but the text below quotes the article in its entirety, interjected by responses.

“Democracy is a form of government in which all citizens take part. It is government of the people, by the people, and for the people. Socialism is where we all put our resources together and work for the common good of us all and not just for our own benefit. In this sense, we are sharing the wealth within society.”

Socialism is the abolition of private property in the means of production, i.e. no individual owns the physical entity of or is entitled to the capital value of any capital or producer good. Once this has been accomplished there remains the problem of how to direct these resources to the most highly valued ends. Contrary to the tacit assumption of many socialist thinkers there is no separate, conscious entity who feels and knows what the “common good” is; there are only individual humans who each value different ends independently; they may agree, in some cases, on what are valuable ends but they still hold these values as individuals and they are liable to change. Further, there will be disagreement on how these ends are to be achieved and precisely which of the scarce means are to be allocated to them. So how is a) the most valuable ends and b) the most suitable means for those ends to be determined under Socialism? How is disagreement on these matters to be reconciled?

All valuable ends are confronted by the same problem – scarcity of the means of production. Hence the economic problem is how to direct scarce means to the most highly valued ends. You can advocate that this can be done either through socialised property or private property but you cannot argue in favour of both together – they are entirely different solutions to the same problem. If you start from the premise that “certain industries” may be socialised you are already advocating that at least some of the factors of production should be allocated to these industries, but this can only be arbitrary. How do you know? And if you know how do you know which factors should be allocated and in which proportion? How do you compare one set of allocations with another set?

A system of private property in the means of production answers this through pricing, profit and loss. For private property gives way to exchange which creates supply and demand which produces prices which produces profit and loss. Hence costs and revenue can be reduced to a single common denominator, the unit of exchange (money), that allows resource allocation to be compared across the entire economy.

In the absence of private property, however, there can be no exchange. There are therefore no prices in the factor of production and no profit and loss. How are the factors of production to be compared? How is the electorate or its democratically elected caretakers of the means of production to compare the cost of 5 tonnes of steel, 3 tonnes of wood, 40 labour hours, 500 sheets of paper, 6 billboards of advertising, 30 hours of telephone calls if it cannot reduce these inputs to a common denominator?

“Of course when people hear that term, “Share the wealth” they start screaming, “OMG you want to rob from the rich and give it all to the poor!”  But that is NOT what Democratic Socialism means. To a Democratic Socialist, sharing the wealth means pooling tax money together to design social programs that benefit ALL citizens of that country, city, state, etc.”

If a person is wealthy in a pure private property society (where trade is entirely voluntary) it is because he has produced a comparatively high quantity of goods that other individuals are willing to purchase. A poorer person has produced comparatively less. The wealth of the rich can only grow if they abstain from consumption of their income and invest it in order to increase the number of goods they can produce. Most of the wealth of the rich consists of, or is derived from, real valuable assets – factories, commodities, plant, shops and inventories. They continue to be rich because these assets are productive – other people are willing to exchange them for another valued good, i.e. money. If they cease to be productive their capital value will decline and so will the wealth of the owner.

If the amount of pooled wealth available for government programs is to increase these real resources have to be liquidated from their current uses and the workers have to be laid off and transferred to Government employment. For every resource that is consumed in a government program that is one resource less that can be used for something else. By which method do you calculate whether the resources are being put to their most valuable ends in the hands of private entrepreneurs or in government programs?

“The fire and police departments are both excellent examples of Democratic Socialism in America.  Rather than leaving each individual responsible for protecting their own home from fire, everyone pools their money together, through taxes, to maintain a fire and police department. It’s operated under a non-profit status, and yes, your tax dollars pay for putting out other people’s fires. It would almost seem absurd to think of some corporation profiting from putting out fires. But it’s more efficient and far less expensive to have government run fire departments funded by tax dollars.”

This is no different from insurance. Individuals pool their premiums together with a private provider in order to provide the resources for extinguishing fires in an emergency and/or compensating the unfortunate victims of fire damage. The only difference is that each individual can choose whether to pool his premiums with one particular provider or not (or at all). The insurer therefore has to act in a way that will retain its customer base, one of which is to keep premiums lower than those of its competitors. The primary method of accomplishing this is to minimise the amount that has to be paid out in compensation and the only way to do this is to prevent and control fires as much as possible. The insurer may, therefore, specify that your home be fitted with some basic fire-fighting equipment such as fire extinguishers or fire blankets and that all of your equipment is electrically tested, for example. If the cost of this is less than the saving you make on a lower premium then you are likely to do this. They may charge higher premiums in cases where flammable substances are stored on a property, or refuse to insure you altogether because the risk would be too great, thus discouraging the accumulation of dangerous materials. The result of this is that each person pays according to the amount of risk he is willing to bear and everyone, consumer and insurer, is equally interested in taking steps to minimise the number of fires as much as possible.

If a fire does start, however, the longer they burn the more the insurer has to pay in compensation to a covered individual. They are therefore likely to respond with the utmost urgency with their own, privately owned, fire fighting equipment or privately contracted fire fighting supplier in order to minimise the amount of damage.

All of these incentives are lost when fire-fighting is managed by the Government. The Government does not need to be concerned about losing your premium to a competitor – you have to pay it in taxes or it will incarcerate you regardless. Hence it is less bothered about minimising the amount of damage. Fewer homes will therefore be installed with preventive equipment and less electrical testing will take place. There will therefore be more fires. Further the tax paid towards fire-fighting services is not adjusted to your individual level of risk; rather it is determined by your income. There is therefore less incentive to avoid the accumulation of risks that contribute towards fire. Every preventative measure you take is an extra cost but there is now no added benefit – you still have to pay the tax and you are still entitled to the same service as everyone else. The result will be less prevention and more fires, more destruction of property and consequently less overall societal wealth.

And finally, once a fire starts, the Government is not going to lose any money if your house burns. Even if it has to pay you compensation the Government will not go out of business if it has to pay too much, unlike a private firm. The Government-employed fire-fighters know that, regardless of what happens to your house, they will, in principle, still be employed and paid tomorrow regardless of the cost to the Government of compensating you for your house. This is not to suggest that Government fire-fighting will always be slow, shoddy and negligent. But given these facts what is the likelihood that a Government fire service will respond more efficiently to a case of fire than a private fire service?

This is a typical case of Government having carried out a particular function for so long that everyone forgets what it looks like when it is carried out privately. Yet the above should demonstrate how it would most likely be done and to a higher degree of efficiency than by the Government.

“Similarly, public education is another social program in the USA. It benefits all of us to have a taxpayer supported, publicly run education system. Unfortunately, in America, the public education system ends with high school.  Most of Europe now provides low cost or free college education for their citizens. This is because their citizens understand that an educated society is a safer, more productive and more prosperous society. Living in such a society, everyone benefits from public education.”

No one denies that education is a beneficial and indeed a good and beautiful thing. But for every resource spent on education there is one less resource to be spent on something else. How do you know that education is the most productive use for these resources?

We could devote the entire productivity of the world to a huge and glorious education system where everyone pops out as smart as Einstein. But there would be no cars, no shops, no food, no computers, no houses, no offices, no factories etc. because all resources are devoted to the education system.

The problem faced by an economic system is not to determine what is valuable in the abstract – it is how to direct the scarce means to their most highly valued ends before all others.

“When an American graduates from college, they usually hold burdensome debt in the form of student loans that may take 10 to even 30 years to pay off. Instead of being able to start a business or invest in their career, the college graduate has to send off monthly payments for years on end. On the other hand, a new college graduate from a European country begins without the burdensome debt that an American is forced to take on. The young man or woman is freer to start up businesses, take an economic risk on a new venture, or invest more money in the economy, instead of spending their money paying off student loans to for-profit financial institutions.  Of course this does not benefit wealthy corporations, but it does greatly benefit everyone in that society.”

But the cost has to be paid by someone. If the graduate has to pay for his own education then yes he has less money to “start up businesses, take an economic risk on a new venture, or invest more money in the economy”. But if everyone else has to pay for his education through taxes then everyone else has that little bit less to do all of those wonderful things. The graduate has only gained what everyone else has lost.

“EXAMPLE  American style capitalistic program for college: If you pay (average) $20,000 annually for four years of college, that will total $80,000 + interest for student loans. The interest you would owe could easily total or exceed the $80,000 you originally borrowed, which means your degree could cost in excess of $100,000.”

If the cost of $80 000 tuition is paid back by the graduate without the interest of, say, $20 000 then that is $20 000 less that can be loaned to another student. There will therefore be fewer funds available to loan to more students for their education. Fewer students will therefore be educated. That is presumably not the intended outcome of this author. Governments, of course, could simply raise taxes to make up the shortfall. But again, all this will mean is that what the graduate has gained the taxpayer has lost.

“EXAMPLE  European style social program for college: Your college classes are paid for through government taxes.  When you graduate from that college and begin your career, you also start paying an extra tax for fellow citizens to attend college. Question – You might be thinking how is that fair? If you’re no longer attending college, why would you want to help everyone else pay for their college degree? Answer – Every working citizen pays a tax that is equivalent to say, $20 monthly.  If you work for 40 years and then retire, you will have paid $9,600 into the Social college program.  So you could say that your degree ends up costing only $9,600. When everyone pools their money together and the program is non-profit, the price goes down tremendously. This allows you to keep more of your hard earned cash!”

The cost of $20 monthly is arbitrary and no proof of this being the real cost under such a system is offered. The conclusion that “the price goes down tremendously” is, therefore, a non-sequitur. If anything, the cost of education is likely to go up as relieving every individual of the cost of his tuition will cause an increase in demand which causes prices to rise.

This is the reason, in the UK, for the recent “outrages” over higher education tuition fees. Government sanctioned loans systems artificially stimulate demand while the Government also caps the number of students, hence leading to a reduction in supply. Increasing demand and suppressed supply equals spiralling costs.

It is therefore Government interference with the higher education system and not private finance that makes bearing the costs of higher education so intolerable to graduates.

“Health care is another example: If your employer does not provide health insurance, you must purchase a policy independently.  The cost will be thousands of dollars annually, in addition to deductible and co-pays. In Holland, an individual will pay around $35 monthly, period.  Everyone pays into the system and this helps reduce the price for everyone, so they get to keep more of their hard earned cash.”

Healthcare premiums are so expensive in the US precisely because of Government interference in the insurance industry (and the only reason that insurance is the preferred method of funding healthcare is an anomaly that originates in The Great Depression). If Governments legislate so as to compel a provider to insure risks which are perceived by the latter as higher and more costly then the latter is forced to take on the burden of paying more than it would like when these risky events transpire (an almost guaranteed certainty if the insured event is something over which the policyholder has control. This is simply compensating individuals for their deliberate actions). Costs, therefore, rise.

Socialised healthcare under Medicare and Medicaid under which the healthcare consumption of an individual is divorced from its cost to the individual, the ease of malpractice suits, and lengthy and bureaucratic drug approval processes mandated by the FDA all contribute to the rise in healthcare costs in the US. None of these are phenomena of the free market.

Holland also operates on an insurance-led basis. One should investigate whether the lower cost allegedly associated with this is because of less and not more Government involvement.

“In the United States we are told and frequently reminded that anything run by the government is bad and that everything should be operated by for-profit companies.”

This is a list of Federal Government departments and agencies. Just a brief glance will reveal Government involvement in commerce, transport, housing, education, broadcasting, agriculture, labour, security, energy, healthcare, environment and engineering. Even if America is “frequently reminded” by somebody “that anything run by the Government is bad” no person can look sensibly at this list and conclude that Government does not already control or regulate vast areas of the US economy.

“Of course, with for-profit entities the cost to the consumer is much higher because they have corporate executives who expect compensation packages of tens of millions of dollars and shareholders who expect to be paid dividends, and so on.”

Executive compensation cannot determine market prices of consumer goods. Every good purchased by you is evaluated on its merits alone, not on the costs that went into producing it. If you deem the merchant’s asking price to be less valuable to you than the utility you will gain from the good then you will make the purchase. Otherwise, you will not make the purchase. It is therefore because an entity’s goods are so highly valued and consequently sell so well that companies are willing to pay more to hire the best employees. Not so if their sales are less successful.

Profit (and loss) is revenue minus costs. In order to make a profit you must increase your revenue as much as possible but what is forgotten is that you must reduce your costs also. Employee compensation is a cost and the higher it is in relation to revenue the lower the profit of the entity will be; the lower the profit, the less it will be able to invest in growth and the sooner it is more likely to stumble in meeting the needs of consumers which is the first step to insolvency.

In 2011, total executive compensation at Tesco plc was £21.7m against a turnover £60.9bn, approximately 0.0356%. Even if executive compensation did drive up consumer prices one has to wonder how such a small percentage could make much of a difference.

Finally, regarding very large corporations one might wish to investigate the effects of monopoly and regulatory privilege granted by Government and the effects of Government–granted limited liability in generating a preference for the large, publically-traded entity before implying that these beasts are creations of the pure pricing, profit and loss system.

“This (and more) pushes up the price of everything, with much more money going to the already rich and powerful, which in turn, leaves the middle class with less spending money and creates greater class separation. This economic framework makes it much more difficult for average Joes to ‘lift themselves up by their bootstraps’ and raise themselves to a higher economic standing.”

You cannot leave the general population with less spending money and push up the price of everything simultaneously. If the population was left with less money then it would have less with which to bid for goods and services. The latter would therefore remain unsold until prices were dropped. If prices were dropped, profits for vendors would drop. If profits drop then costs have to be cut. One of those costs is executive compensation.

If a firm, however, is able to continue to raise its prices without affecting sales and this increases profit margins beyond that experienced in other industries, resources are diverted away from the less profitable industries and into the profitable both by the existing entity and by new competition. Supply is therefore increased and prices consequently decrease.

It is therefore very difficult for an entity to raise its prices to increase profits without a) choking off sales or b) attracting competing investment.

The most effective way for the latter to be avoided is for the entity to induce the Government to regulate the industry. Compulsory licensing, planning permission, Government imposed trading standards, health and safety standards, employment regulation, etc. all serve to deter competition. For every extra regulation that must be complied with is an extra cost that a new competitor must meet and, by virtue of its status as a start-up, must consist of a larger portion of its costs that those of an incumbent provider. There is therefore a tendency for larger firms to become entrenched and for the “Average Joes” to be unable to “lift themselves by their bootstraps” – all because of Government intervention.

“So next time you hear the word “socialism” and “spreading the wealth” in the same breath, understand that this is a serious misconception.”

That is precisely what the effect of socialism is. In a capitalist society wealth accumulates to each person according to his productivity. If another system is adopted then the wealth must be distributed in a different way with a different result; otherwise implementing socialism would be pointless. Hence socialist writers devoted part of their theory to the problem of distribution of goods in a socialist society, i.e. to “spreading the wealth”.

“Social programs require tax money and your taxes may be higher.”

Correct.

“But as you can see everyone benefits because other costs go down and, in the long run, you get to keep more of your hard earned cash!”

What has been demonstrated, in fact, is that costs rise under socialism. If an individual does not have to pay for his consumption, all else being equal he consumes more. Hence demand rises and so do costs.

“Democratic Socialism does NOT mean taking from the rich and giving to the poor.”

It means taking from the productive to fund the unproductive. This can be the only logical outcome of a system other than private property, where the fruit of production accrues to the producer.

“It works to benefit everyone so the rich can no longer take advantage of the poor and middle class.”

It benefits the unproductive ahead of the productive. The unproductive are able to take advantage of the productive. Productivity therefore becomes less valuable and decreases whereas un-productivity becomes more attractive. Societal wealth therefore declines.

POSTSCRIPT: The main error of the author of the original article (apart from providing blatant examples of Bastiat’s famous “broken window” fallacy) is the belief that a market economy provides benefits only for some whereas “democratic socialism” provides benefits for all. Precisely the opposite is true. Under the free market all exchanges are voluntary. If A exchanges a good with B then it must be because they each value what they receive more highly than what they give up. Both therefore benefit from the transaction and we can say that social utility is increased. A system of “democratic socialism” however would necessarily involve violently enforced transactions (taxes). If an individual has to be coerced into a transaction then it necessarily means that he values abstaining from the transaction more than entering it (otherwise he would have entered it voluntarily). The recipients of Government spending may gain (as does the Government itself) but here, in contrast to a market economy, some have gained at the expense of others. As we cannot make interpersonal utility comparisons (i.e. we cannot “measure” utility) it is impossible to say that the gain to one is greater than the loss to another. But even if this wasn’t true the fact remains that the coerced individuals would have gained greater utility from not being taxed and to them the transaction is very much a loss; hence a system of “democratic socialism” does not provide “benefits for all”.

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Natural Selection, Capitalism and Government Intervention

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The Oxford Libertarian Society, after a brief hiatus, has recently launched its “Hayek Discussion Group”, which seeks to “encourage graduate students and scholars alike to submit abstracts. We are looking for interesting and innovative works which challenge the contemporary thinking about how society should be ordered”. Below is the first submission offered by Justin E Lane, D.Phil. student in the Institute of Cognitive and Evolutionary Anthropology, University of Oxford, followed by some comments.

Topic: “Evolution and governmental policies: How the process of natural selection can serve as a basis for fiscal policy.”

Abstract: Many scientific theories can, and have, been used to inform political thought. I would like to propose that evolution by natural selection can inform the formation of policies in capitalist economies. As the basis for this argument, I would defend that capitalist free markets are the most “well-suited” or “natural” forms of economies as they are operational analogies to natural processes. This knowledge of evolution can be particularly informative in discussions of authority and law, but this discussion will concentrate on its theoretical application to the idea of “the free market” and how, if left alone, it will act in a naturally selective manner not unlike evolutionary processes in the animal kingdoms. I would also like to raise the question, when-or if-, it is appropriate for governmental bodies to ever step in to guide this process in a more controlled selection process. In conclusion, the interplay between fiscal policy –including energy policy and resource allocation- inform national security interests and how a similar foundation can begin to inform these issues as well.

Given that Lane has not had a chance to fully elaborate these thoughts it is appropriate that the initial comments are relatively brief. Unfortunately brevity cannot mask the flaws in this attempt to justify capitalism.

At the foundation of the capitalist economy is the individual human, the being that desires, chooses and acts. He is conscious, thinking, discriminating, preferring, reasoning and the content of all of these aspects in his mind can change from one minute – nay, one second – to the next. Indeed, the processes of production, trade, consumption, saving and investment are all synonymous with progress, that they are entered because the acting individual views the result as a greater or more valuable thing than what existed before.

Natural processes, however, lack all of these features. They are purposeless, occurring and repeating while being empty of any desire or conscious thought behind them. There is no achievement or progress in moving from one stage to the next, and there is no one to say that the latter stages are any “better” than the original. Events may be regular, they may be measurable and they may be predictable or non-random but they are neither valuable nor achieving anything.

Evolution is precisely one of these inherently purposeless processes. It is neither “good” nor “bad” that natural selection occurs; it is merely an unconscious unfolding of events initiated by unmotivated influences. It doesn’t lead to anything “better” or “higher” than what proceeded before – it takes a desiring, choosing, acting human to determine this. Selection in the market economy is therefore entirely unlike natural selection – it is the result of choices motivated by desires, to achieve something that is inherently better than what preceded it.

Any justification, therefore, of a capitalist economy that relies on its alleged process of “natural selection” simply raises the question why should we desire the outcomes of these selections? Why are these outcomes “better” than any other and for whom are they better? In short, the theory presented in this abstract merely restates the very starting point of political discourse – is individual, uncoerced action “better” than action coerced by the state? This is a question that Lane, in his penultimate sentence, appears to introduce as a mere secondary issue when in reality it is the crux of the entirety of political philosophy; indeed, his position is akin to that of an historian who says “Oh I would also like to look at what happened in the past”. As he provides no justifiable answer whatsoever to the all-important issue we are very firmly still at square one.

Lane’s second error lies in the belief that scientific theories may legitimately inform political thought. If it is accepted that theories applicable to unconscious, purposeless matter are also applicable to thinking, desiring, choosing and acting humans then one accepts that other such theories and analogies may, in principle, be valid. Hence, as Lane’s abstract provides us with no reason to accept the contrary, why should they not be tried and tested?

It is the opening of the Pandora’s Box of such positivist methodology that has led to some of the most horrific and overwhelming conquests of the individual by the state. Not only did the Communist experiment in the former USSR take an eye-wateringly drawn out seventy years to be “proven” false at the cost of tens of millions of lives, but we are continuingly plagued by constant testing and tampering by so-called economists who, in their hubristic ignorance of the correct methodology for their science, continually expect the results of their interjections into human behaviour to be qualitatively and quantitatively inline with their hypotheses. And if not then why not just adjust it slightly and try again and again and again until something “works”?

Perhaps Lane is scratching the surface of a natural law justification for private property and free enterprise – that the free market is the only way that an individual can truly flourish according to his nature? May be so, but his way of describing it in the abstract is, at best, confused and, at worst, simply incorrect. If he wishes to proceed with justifying capitalism in the same vein then he should call for a swift denouncement of positivism and any analogising of the market economy to scientific or “natural” processes and turn his attention instead directly to the natural law tradition.

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Response to Petition: “Raise the Minimum Wage…”

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The author was invited to sign the following petition that recently appeared on change.org. This post is a response to this petition.

Petition:

“Every hardworking American deserves to earn a LIVING WAGE. Every small business needs CUSTOMERS. By raising the minimum wage, we create more customers for business–like Henry Ford did when he paid his workers the unheard-of wage of $5.00 a day so that they could afford to buy Ford cars. With every employed adult earning a living wage, we reduce the ranks of those on WELFARE and increase SELF-RESPECT. We protect FAMILIES by reducing divorce and dysfunction at the lower end of the socioeconomic scale. Instead of taxing people to pay for welfare, customers pay for this benefit through a slight rise in the price of goods and services they purchase from those with minimum wage jobs.”

Response:

Your aims are noble enough, to a) reduce the number of persons who receive assistance from the welfare state, b) to reduce the tax burden of the same, and c) to create more customers for business. Your proposed method of achieving these wonderful aims is, however, far from satisfactory.

Every hardworking American deserves to earn a LIVING WAGE.

Even if the concept could be defined objectively there is no such thing as a “living wage”. There is only what has been produced and this may be below, at or above the amount “necessary” on which to “live”. Nobody works for a money wage but rather for the goods and services that it can buy and a minimum quantity of these do not magically fall from the sky and present themselves for consumption.  Nor can The Congress make them appear by waving the legislative wand – they have to be worked for by someone.

Consider first of all an economy where I produce goods for only myself. If I bake three loaves of bread in a day then three loaves of bread is what I have. If, however, I bake eight loaves of bread in a day then eight loaves of bread is what I have. Assume for argument’s sake that the former situation is barely sufficient to keep me alive and the latter allows me to live comfortably. If I have produced only three loaves then three is what I have to enjoy at the end of the day. If this causes me to live at near-starvation point then nothing except more productivity on my part can change that. If, on the other hand, I have produced eight and can live handsomely from them then again it is only because I produced them.

This fact does not change when I do not produce goods for myself but instead offer them in exchange for other goods. If I swap my three loaves of bread for steak then the steak is now my “wages” for having worked to produce the bread and the bread is now the butcher’s “wages” for having produced the steak. But if the three loaves that I have paid the butcher is barely enough to keep him alive then why should I expect a quantity of steak in return that will do any more for me? Why do I “deserve” to earn a “living wage” when I can barely offer the same to the person producing it for me? Does he not “deserve” it also? Where does his “living wage” come from if I haven’t produced it?

None of this changes in a highly complex, industrial society where goods are not exchanged directly but for money. My wage is paid out of my employer’s revenue and his revenue is achieved only as a result of the productivity of the employees. Therefore if I am to earn a given wage then my productivity must enable my employer to earn at least that much in additional revenue as a result of employing me (and often much more as the total cost of employing a person is often much more than the wage paid). If the costs of my employment equal additional revenue then employing me is a break-even business and, while my employment is barely sustainable, there is no incentive for the employer to continue it. If the costs are greater than revenue then I am making a loss for the employer and I will have to be laid off.

Minimum wages therefore place a threshold of productivity which the worker must achieve before he can be legally employed; for if my ability or skill means that I cannot produce enough to enable my employer to earn enough revenue to pay me the minimum wage then I will simply not be hired. Highly skilled and experienced workers will have little problem in achieving this threshold (unless the minimum wage is set very high). But low-skilled or inexperienced workers, the very ones whom you appear to be saying are in need of help, may find it next to impossible. All you do is raise the bar over which they have to jump to get a job without improving their means to do so. Indeed, you totally impede any path to them gaining such means for the worker cannot use price as a bargaining tool. If he was unskilled or inexperienced he might happily say to a prospective employer “yes, you would pay $8/hour for someone with experience. How about I, not yet blessed with experience, do it for $5?” If the employer accepts he/she is compensated for the lack of ability or experience by the reduction in price; the worker, on the other hand, gains employment during which he may learn a valuable trade or skill that may enable him to progress to higher levels of productivity and, hence, higher wages at a later date. Even if he doesn’t quite achieve that, at least he is employed and such employment is likely to mould him into a responsible adult with self-respect. However, with an imposed minimum wage above $5 (in this example) this option is closed to both the employer and employee. The worker will simply not be hired.

The absurdity of the minimum-wage is highlighted even more when you consider what its advocates are really arguing. Presumably you think that if am not employed by an employer (i.e. I do work with a value of $0) it is fine for that employer to pay me $0? And also, if your ideal minimum wage is set at $8/hour and I do $8 worth of work for the employer, it is fine for me to earn $8/hour? But if I work to produce anything between $0 and $8 suddenly that is evil and immoral and should be outlawed. Why this lacuna? Why is producing $0 or $8+ fine but producing $4.50 is not? Is $4.50 not worth $4.50 in the same way that $0 is $0 and $8 is $8? Why is it that if I produce $0 it is moral and proper for me to be paid $0 yet if I produce just $0.01 for my employer the latter should be forced to pay me the “living wage” of $8? Further if I am not being paid for my productivity but instead am being paid a legally enforced form of charity then aren’t I in just the same position as if I was on welfare?

Finally, it is the fact that minimum wage legislation impacts upon the low-skilled or inexperienced that makes it so destructive. For these people are likely to be any combination of young, “unprivileged”, with few educational merits, or disabled – in short the most vulnerable in society who are more likely to succumb to a life of delinquency or welfare-dependency when faced with no other option. Such a person is likely to respond rather coolly to your demands for a “living wage” if he can’t get any wage at all.

By raising the minimum wage, we create more customers for business

If it is that easy then why not have an infinitely high minimum wage? Why stop at $6 or $8, why not raise it to $20, $100, or $1 000? In fact, why just not make everyone millionaires? Think of all those millions that will be spent in small businesses around the country!

Your proposal rests upon the fallacious theory that workers need enough “purchasing power” in order for businesses to expand production. The causal relationship is precisely the other way round – it is increased productivity that permits an expansion of purchasing power. Going back to the example of bread, if I bake three loaves of bread what I have is three loaves of bread with which to barter. If I bake eight loaves of bread I now have eight loaves of bread with which to barter. Eight loaves of bread will trade for more than three loaves of bread. I have more “purchasing power” because I have been more productive.

What, then, will be the effect of your proposal upon achieving your stating aims?

Regarding first of all those adults who are unemployed and are fully supported by assistance from the welfare state, why will raising the cost of employing them induce employers to do so? If they were not prepared to employ them to do a certain job at a lower rate, why on earth would they suddenly, all else being equal, be inspired to do so at a higher rate? Let’s say you go to the grocery store and see chicken on sale for $5/unit, having never bought it before. You decide that at that price it is too expensive for the benefit it will give you and you decline to purchase it. Suddenly, the Government decrees that everywhere chicken producers are not earning a “living wage” and decrees a minimum price for chicken of $8/unit. Hurrah, the plight of the exploited chicken farmers is over! But if you did not purchase the product at $5/unit why would you be any more inclined to purchase it at $8/unit? It’s the same thing, only now more expensive. Has the minimum price helped the chicken farmers vis-à-vis you in anyway whatsoever? If anything, wouldn’t lowering the price be the correct thing to do induce you to buy chicken? Exactly the same is true for businesses hiring employees. The same amount of productivity on offer for a higher price induces no new purchasing whatsoever. It seems impossible, therefore, that your petition would reduce the ranks of the unemployed who are dependent upon welfare.

For people who are both employed but remunerated at a rate below what you would call a “living wage” and who are partial recipients of welfare, raising the minimum wage will (if their current wages are below the proposed threshold) increase the costs to business of achieving the same amount of productivity. Employers have only the same stock of goods to sell to customers but now they must pay more for their employers to produce them. Revenue therefore remains equal while costs increase. How might employers respond?

First, they might gradually replace the employees with capital equipment (i.e. machines and tools). For now, with the cost of labour increased, the cost of capital relative to labour is lowered and it becomes more profitable to replace workers with labour-saving devices. However, as there has been no genuine saving (by necessity the cost of capital must be between the old wage and the new wage – if it was lower than the old wage then capital will already have replaced labour without your proposed minimum wage; if it is higher than the new wage then labour will remain employed) there are no spare funds with which to employ these workers elsewhere. So workers that were formerly partially employed would now be fully unemployed as a result of your proposal and, furthermore, will have increased the burden to the welfare state and its associated tax demands rather than have caused a decrease to either. An analogy is that if you were a purchaser of chicken at $5/unit, the new price of $8/unit you find to be too high and you switch to cheaper substitutes.

Second, the employing business may decide to absorb the extra cost from profit. But what if the increased wage completely consumes the profit margin so that the business now makes a loss? A business that loses money will have to close shop and the workers will, once again, simply have to join the ranks of the unemployed. If profit margins are so slim it means the employees were barely affordable before and their employers were no doubt straining to control costs to stay afloat which would – crucially – keep those people employed. But along you come to forcibly raise their costs thus destroying their profit margin and guaranteeing nothing to the workers but unemployment.

But assuming that a profit remains and the business can stay afloat, a lower profit margin means decreased funds for investment which the business can use to expand. It is such expansion that requires the business to increase its demand for workers, and increased demand results in increased wages. If they cannot do this then wages cannot be increased naturally. Furthermore, in the economy as a whole not all businesses will be affected in the same way. Labour-intensive industries will be the hardest hit while capital-intensive industries will suffer more lightly. Investment funds will therefore be withdrawn from the labour-intensive industries and diverted to the now more profitable capital-intensive industries; or the labour intensive stages of production will disappear overseas and the US will be left only with capital-intensive industries – plus an increased amount of unemployment from the displaced workers.

However, your proposal appears to indicate that businesses will attempt to pass these costs on to their customers. If the customers who have to bear the burden of the increased costs are the same people who have received the new, higher, wage, then you are not any step closer to weaning them off the welfare state. If their income increases but so do their costs then in real terms they are in exactly the same position as they were before. What are you going to tell them? “Congratulations, your wages have been doubled! But now you have to pay twice as much for everything as you did before!”

If, however, the burden is borne by those who do not receive an increased wage then, all else remaining equal, the customers can only do one of two things. Either they will reduce the quantity they purchase from the business, or they must divert spending from elsewhere in order to meet the added cost. If the former, then while the business’s nominal revenue may remain the same the quantity of goods needed to achieve that revenue is reduced. Reduced production therefore requires downsizing and downsizing means workers will be laid off. If customers divert spending from elsewhere then the businesses from where they withdraw funds will suffer from reduced revenue and they will lay off workers. The result in either case is increased unemployment and increased dependency upon the welfare state. Furthermore, the poor customers will have to suffer both from the increased costs of their purchases and from increased taxes to fund the now expanding welfare state.

Finally, regarding your desire to help small businesses, which type of businesses are more likely to be disadvantaged by a minimum wage? Large, multinational businesses which huge reserves of capital or the new start-up with limited investment and an unestablished market? Which of the two benefits more from being able to hire employees cheaply and which is likely to struggle from being forced to pay more for those same workers? Minimum wages, like all employment regulation, are a boon to large, established and politically connected businesses that can more easily absorb the increased costs while forcing their smaller rivals, the ones you are trying to help, out of business.

It is clear, therefore, that this proposal will not fulfil its noble intentions and, worse, will have the very opposite effect of exacerbating the very problems that it seeks to eliminate. For these reasons (aside from the fact that I am neither a US citizen nor resident) I cannot accept your invitation to support your petition and I urge you and everyone else whom you invited to abandon it.

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