Experts tell us that if we want things like bridges, parks, public streets and fire departments, then government must provide them. The private sector either can’t or won’t, or things would simply become awful if it did.

That conclusion is mostly justified by the theory of “public goods,” for which we can thank Paul Samuelson, the first American economist to win a Nobel Prize.

Paul Krugman — another economist and ceaseless supporter of government spending — makes the similar typical claim in this blog post, where he writes that to deny some things must be provided by the government is “stupid,” and to think so you must have slept through Econ 101. By “things the government must provide,” Krugman means everyone being forced to pay via taxation.

Disturbingly, the taxation solution requires many people to foot the bill for things they will never use, or to fund things they oppose. It also means people have less money to do with as they choose. Krugman maintains this is necessary because some things are “public goods whose benefits can’t be internalized by the market.”

A hole punched through a gigantic log at Kauffman Legacy Park; a private, yet free public park in Kansas City.

A hole punched through a gigantic log at Kauffman Legacy Park; a private, yet free park in Kansas City.

Fortunately, this is one case where “experts” like Krugman are embarrassingly wrong. Yes, we do need fire departments, free education and the like, but the government doesn’t have to pay for them. We will get them, sometimes via the market, and sometimes by different means such as charity and philanthropy. In fact, the aim of this article is to show you just how easy it is to punch holes in claims like Krugman’s — an example of what I will call the “public goods argument.”

Punching holes in the public goods argument is actually an old sport. In the 1960s, Paul Samuelson cited, in a footnote in his textbook Economics, John Stewart Mills’ example of the lighthouse as something that markets could not provide.

This prompted free market economist Ronald Coase to respond with historical documentation of private lighthouses built during the 17th Century in Britain. Since then, people have continued to provide empirical evidence to refute public goods arguments, and cheerleaders for government spending — the Krugmans of the world — have continued to ignore the evidence.

But we’ve got to keep showing them. So, I’ve located several things, right here in Kansas City, that stubbornly exist in contradiction to what experts claim and which serve to undermine the case for public expenditure by Krugman, et al. I’ll drive to each one, and document it with a digital camera. I’ll note how far the thing is from my home, and how long it took me to drive to it.

After seeing how easy it is to find things experts say you won’t, I hope you want to go out and try it yourself.

Exhibit 1: Private Public Street

Cedarbrooke Lane, Cedarbrooke subdivision
South Kansas City

80 ft (2 seconds)

I don’t have to go far before I reach my first destination. At the end of the cul-de-sac, about 80 feet from my garage door, runs Cedarbrooke Lane. This is a privately owned, public street, despite the fact that even most of its owners are probably unaware of the fact. I roll off the gently sloping suburban curb onto a wide expanse of blacktop. Aside from one shallow pothole to the north of me, the street is in good condition and looks comparable to the city-owned Locust Street, which it adjoins. The street is freely accessible to the general public, as well as US Postal and other service vehicles, so it is truly public in the sense that it is available to all who wish to drive on it, yet it is paid for privately.

Such a thing shouldn’t be possible, but here it is.

Apart from their being constructed at all, a big concern about private streets is that they might fall into disrepair because the owners can opt to neglect them when money is short. In the face of such fears, it is interesting that this street has existed for forty years and has always been kept in good condition.

But how? The answer is that it belongs to a homeowners association. When you buy a home in the Cedarbrooke subdivision, you agree to pay dues for the provision of things like trash, water and landscaping, as well as the upkeep of Cedarbrooke Lane. The HOA has a contractual obligation to maintain certain aspects of the member properties. If a particular homeowner fails to pay his or her dues, the HOA is empowered to put a lien on their property to ensure that it can fulfill its obligations.

As a result, not only do the homeowners who together own Cedarbrooke Lane benefit from the street, so does the entire South Kansas City community.

If only the public goods argument were in as good a shape as Cedarbrooke Lane.

Exhibit 2: Private Welfare

Great Temple Mausoleum at Mount Moriah Cemetery
South Kansas City

.25 miles (2 min)

Today it is taken for granted that government must take money from you to make sure someone else doesn’t “slip through the cracks.” Advocates of public social welfare claim that although everyone benefits by not having other people living in squalor, we can’t count on voluntary giving to provide for all who need help. Likewise, they say, private insurance surely won’t cut it because — being profit driven — insurance companies have an incentive not to pay.

Yet this Masonic hall (which spookily, doubles as a mausoleum) is a testament to how, for thousands of years, people have found inventive ways of taking care of one another voluntarily. The Freemasons probably originated as a guild of professional stonemasons in the middle ages. Among other things, guilds provided for the families of member craftsmen in the event of the member’s injury or death. Up until the first part of the 20th Century, such societies in America combined aspects of charity and private insurance: members pooled their resources and the organizations used those funds to help members address hardships.

As David T. Beito describes, these organizations flourished when times were toughest, like during the Great Depression:

The heyday… [of mutual aid societies in America] was during an era when millions of Americans lived on a scale of poverty which would be considered intolerable by today’s underclass. Despite this, millions invested their scarce resources in erecting a vast system of fraternal mutual aid. Although insurance gave some protection, those who subscribed to fraternal societies gained access to services not easily guaranteed in a commercial contract.

Today government programs have crowded out much of what these associations once provided. Yet a friend of mine, who belongs to a lodge, tells me that Freemasons still vow to help fellow lodge members should they lose employment or housing. Next time you are shopping for insurance try asking your new agent if he or she will swear to help you out of the next pickle in which you find yourself!

Just another chink in the armor of the public goods argument.

Exhibit 3: Private and Free Public Park and Botanical Garden

Kauffman Legacy Park & Kauffman Memorial Garden
Midtown Kansas City

11.5 miles (16 min)

Of all public goods, my favorite is the park. What would cities be like without them? But who would want a world where every park, if it existed at all, had a tall fence around it forcing you to pay to get in? What about people who could not afford to pay? These questions call to mind the dismal reality envisioned by the Krugman’s of the world if the government doesn’t provide us with parks.

So I have headed north and soon I’m in my old stomping grounds — Midtown Kansas City. I’m here to put paid to the supposed rule that parks can’t be private and free at the same time.

Amazingly, I find not only a free park, but also a free botanical garden thrown in for good measure. Together Kauffman Legacy Park and Kauffman Memorial Garden span six blocks just east of the wonderful Country Club Plaza shopping district. The park provides outdoor leisure while instilling conservation values by exposing you to the beauty of a native landscape in the heart of a city. Kauffman Memorial Garden is a world-class botanical garden that looks like some medieval nobleman’s courtyard. It’s a favorite for wedding pictures.

Both were built in 2004 along with the Kauffman Foundation Conference Center. They are fast becoming two of the most cherished destinations in KC. Amazingly, all of this goodness costs the Kansas City taxpayer nothing, nor are people charged to use either of the two amenities. The Kauffman Foundation pays for these public amenities the same way it funds educational programs promoting entrepreneurship among disadvantaged youth — via voluntary contributions.

Krugman’s looking tired. Maybe he should take a walk in the park.

Exhibit 4: Private Public Radio

KCUR studios
Midtown Kansas City

7.1 miles (16 minutes)

As usual, as I drive today, I am listening to KCUR – 89.3 FM (Kansas City Public Media). The uniqueness of American public radio is underappreciated by libertarians: Whereas in most Western countries public radio is paid for via some sort of tax, in America, only 16% of its funding comes from government while a huge 39% comes from individual donations. The rest largely comes from charitable foundations and corporate benefactors. With such minuscule public funding, America’s public radio demonstrates that yet another public good arguably refutes what prevailing theory asserts about it.

Libertarians should make a point of contributing to public radio so as to raise the percentage of private funding even higher. We could easily see the day when all funding from taxation could be eliminated with no negative repercussions. By eliminating government involvement, NPR (National Public Radio) would only become more independent — and more secure: While the experts insist that the only way to guarantee the independent voice of public broadcasting to Americans is for government to provide it, according to NPR’s website, individual contributions are the most reliable source of funding in hard times!

Public radio gets my gift of support again this year. Paul Krugman gets a lump of coal.

Exhibit 5: Private Policing

Chesley Brown Security Vehicle
Midtown Kansas City

11.5 miles (16 minutes)

Chances are you feel safer at the grocery store or out on the town in recent years than you previously did. Well it’s not because we have more municipal police on the streets, but rather because we have more private security. Police are one of the standard examples cited as a public good not producible on the market. Yet more and more, police forces are being supplemented by private security officers which can stand guard rather than simply respond after something bad happens — too late to help the victims.

In The Privatization of Police in America, James F. Pastor observes that private police now outnumber municipal police officers by as much as 4:1. Additionally, more support staff are employed, and the annual revenue of private security outstrips that of municipal police, as well:

Private policing has annual revenues over $52 billion with the industry employing 1.5 million people. In contrast, public police spend $30 billion with a workforce of approximately 600,000.

How is this possible? Stores and entertainment districts have an incentive to keep patrons safe as well as to protect their own property. Similarly, homeowners associations can better support property values by providing a safe environment while spreading the cost among the property owners. Just as with the public street I mentioned earlier, it won’t matter that non-residents benefit: if an HOA-contracted security service happens to deter rapists or muggers, thus protecting joggers in the surrounding neighborhood, it won’t cost the HOA any more.

So spill-over effects — what Krugman referred to in his blog post as “benefits not captured by the market” — are not the big problem experts claim they are. It’s a good thing that people who are not the intended objects of protection nevertheless benefit from the deterrence that protective services provide, and it won’t reduce the amount of services employed.

I chance on a good shot of a security vehicle. Judging by its proximity to both The Plaza and the Kauffman properties, I imagine its driver is probably patrolling for one of those organizations. Nevertheless, people who live close by benefit from the deterrence the roaming vehicle provides. Yet that fact has not stopped the client organization from contracting with the security company, despite what public goods theory predicts!

Go to jail, Paul Krugman. (Monopoly reference.)

Exhibit 6: Private Art Museums

Nelson-Atkins Museum of Art
Kemper Museum of Contemporary Art
Midtown Kansas City

11.8 miles (17 minutes)

As with parks, museums are things we’d like folks not to have to pay for since we want as many people as possible to consume the knowledge and culture that such institutions conserve and expound. We want that because it betters our society.

But art is expensive, and so are the museums that house much of it. Cities like St. Louis, Chicago, and New York subsidize the expense so as to allow everyone admission at no cost. Like free parks, free museums fit the description of a public good to a T, because, by their very nature, they are non-excludable making them difficult to pay for.

If the experts are correct, it must be necessary to publicly fund art museums, as the cities listed above do. Except that that’s not what happens in Kansas City, where not just one, but two exceptional museums, not far from each other in KC’s Midtown area, defiantly remain privately owned, but nevertheless, free to the public.

The world renowned Nelson-Atkins Museum of Art has been around for 80 years and never cost the Kansas City citizenry a dime, either in taxes or entry fees.

Likewise, the Kemper Museum of Contemporary Art has not charged for use since its opening in 1994.

These museums — massively expensive as they are — are entirely funded by voluntary contributions: Large sums pledged each year by the well-to-do and corporate sponsors, and small gifts of dollars and loose change contributed by the people who give at the door.

The public goods argument belongs in a museum — a history museum.

Why They Get it Wrong

In some of the cases presented above, the difficulties for the market with regard to public goods was easily overcome — in hindsight.

To paraphrase a response by Richard Dawkins to skeptics of Darwinism, an appeal to your personal incredulity is not a strong argument against the market. The fact that economists sitting behind a desk or scribbling on a whiteboard can’t imagine how the market will get something done has nothing to do with whether it will.

But in the examples I found, it wasn’t always the market that got the job done: sometimes it was just good old civil society — the private sector rather than private enterprise — and always the result of human values, choices, and actions. In either case, government and taxation were not necessary.

As for cases where charity and philanthropy are the vehicles for providing public goods, one reason public goods theorists get it wrong, and assume people won’t do enough, is that they over extend the classical economist’s model of the self-interested rational actor, homo economicus.

That model helped illuminate the actions of the “businessman” as Ludwig von Mises explained; but taken more broadly, it’s a bad caricature of a real human being. Unlike homo economicus, who wouldn’t lift a finger if it wouldn’t increase the value of his bank account, real people donate to help others or to fund a community undertaking they want to see accomplished. When they do, it is because they value others being better off or the success of a project, more than they value the money they contribute to that end.

But in order for people to voluntarily contribute to make society better, they have to have enough left over after other things are paid for. Since taxation reduces people’s expendable income, every government-provided public good reduces people’s ability to help voluntarily.

A Call to Action

Go out and find your own examples of privately provided goodness and punch some more holes in the the public goods argument. It’s fun and all too easy!

Thanks:
Ian Huyett, for introducing me to the concept of mutual aid societies.
Jeffrey Hull, for suggesting I change “Poking” to “Punching” in the title—just to add a little punch.
Erin Skornia, for letting me post photos of her irreverently running in a sprinkler at a cemetery.

“Punching Holes in the Public Goods Argument” by Tracey Zoeller , including all photography and illustrations, is licensed under a Creative Commons Attribution 3.0 Unported License.

“Krugman Able to See at Last” by Tracey Zoeller is based on a photograph by 00Joshi on Flickr at http://www.flickr.com/photos/00joshi/6331682723/.

July 14, 2013Science, The Economy

Contradictions

James Maierbeyond coal, coal, environmentalism, environmentalism contradiction, environmentalist, green, indiana green living 2 Comments

In my state, there is a free monthly magazine that circulates entitled Indiana Living Green. It is a magazine dedicated to everything environmentally friendly, or so they would claim. To my surprise, this month, two articles side-by-side were “Beyond Coal: Indiana’s Best Eco-Movement” and an article entitled “Making Nikola proud: The Tesla all-electric car”. These articles being paired together points out one of the greatest ironies of the modern environmentalist movement- they loudly denounce fuels that require combustion, but at the same time, quietly reap the rewards of cheap energy from sources like coal. It’s classical white liberal activism, the concept that it’s perfectly fine to use something as long as you are protesting it, the “do as I say, not as I do” mentality.

Whether these environmentalists like it or not, their use of smart cars is probably putting more carbon into the atmosphere than my minivan. That electricity that they are using to power their car didn’t randomly appear: it came from somewhere, and, in my home region of the Midwest, it likely came from a coal power plant. While we have solar power and windmills here, solar power has a very limited presence. Likewise, the windmills are a result of subsidies and wouldn’t hold up to the rigors of the market.

How these environmentalists can both denounce coal power and praise electric cars that run on such power still eludes me. Do they presume that as soon as coal is gone, somehow wind and solar power will automatically be viable to produce the amount of energy an affluent society needs? Or are they doing what Hayek warned against: only thinking about the short-term and ignoring the larger picture about what will happen in the long-term when energy is no longer cheap enough to maintain the viability of smart cars?

I harbor no malice towards smart cars, they’re a great innovation. However, I think that if someone is going to be an environmentalist, they should take their ideology to the logical extreme. Concepts of “sustainability” will produce amounts of carbon, no matter what. Windmills are made of metal, and thus must be forged with some type of heat and then transported long distances by massive flat-bed semi-trucks and wide load police escorts.

Time immemorial, there has been no way man could survive without the production of some type of carbon, whether he was building a fire or cooking meat. Yet, this element (the ^4th most abundant in the universe) is a boogeyman to environmentalists who fail to see it as a chemical that is not only given off in reactions, but vital to life as well.

I pose a challenge to environmentalists: be ideologically pure. If you’re going to denounce cheap fuels, stop using them. That’s all I ask. Oh, and you can start by selling your Prius.

Hey bro, don’t you know that PVC pipe is pollution?

June 24, 2013The Economy

The Unseen Effects of Regulation

James Maieralabama rig ban, bass fishing, fishing, fishing lures, frederic bastiat, mann's bait company, market distortions, research and development, the alabama rig, the seen and unseen 1 Comment

Government regulations are costly, not only on the surface, but also in the unseen results they bear. Regulations, such as various state statutes banning the multiple hook baits known as Alabama rigs, have resulted in the unnecessary expenditure of research and development dollars of tackle companies like Mann’s Bait Company on the exploitation of loopholes that statutes inadvertently create.

While it can be argued from a utilitarian perspective that these statutes have “stimulated” innovation, to what extent could that research and development money have been used on another product that would enrich my life? While the example of a fishing lure seems rather frivolous, it is merely a small example of something that can be more simply explained than another matter of greater complexity or seriousness to society. In light of my example, couldn’t those dollars have been spent on yet another bait that would spawn the spontaneous order that exists in the fishing lure market and many other markets with low cost of entry and significant lack of intellectual property protections (notably, the garage lure-makers and those who make and sell after-market accessories)?

Had the money that Mann’s spent on skirting the existing statutes to make a bait that will possibly be affected by future statutes been spent on a new concept, there would be a real stimulation, a real demand for products at every level of the market, from components to the final product offered at the local tackle shop. While statutes have created such an innovation, it’s still a market distortion that would not exist had government not intervened to tell anglers what was acceptable to fish with.

Thinking with an economic mindset has made me realize that this exists not only in the world of bass fishing, but in every aspect of the market. It is representative of, as Bastiat mentioned, the unseen that policy-makers do not consider when they write laws or take actions, no matter how well-intentioned they are. For every statute on the books that “created” one product, hundreds more were not created. Entire legal markets wither as a result of bans of certain items or mandates for other items. While these products remain unseen, the lack of employment in certain sectors can be seen. The suffering of families whose income providers were laid off can be seen. The fall in sales of the small-business owner can be seen. At the personal level, our standard of living decreases, or doesn’t become what it had the potential to be. All of this is due to bureaucrats whom are overzealous in telling us that we are better off without something or telling us that we absolutely need something.

I’d like to see a world where Mann’s Bait Company and thousands of small business owners can actually innovate and sell their products without having to concern themselves with such market distortions that ban or mandate certain products. I’d like to see a world where no business has to contend with such regulations and can actually put money into areas where it needs to be placed: inventory, payroll, merchandising, displays, and, the elements that actually stimulate real employment, spending, and innovation. It’s basic morality to allow mankind to design, create, and sell what his mind can conceive; to do otherwise violates his natural right to the fruits of his labor.

Baits like this that only exist to exploit loopholes in statutes are merely market distortions. Had that money been spent on R&D for something organic, there would be a real stimulation and real demand.

May 12, 2013The Economy

Getting Something for Nothing

Tracey ZoellerCounterfeiting, Deflation, federal reserve, Inflation, Investing, Money supply, Ray Kurzweil, Ron Paul, The Great Depression Leave a comment

“Make your money work for you: invest it!” That’s what we’re all told. Too bad we need so much of our money in the here and now, rather than a distant future that may never come, since much of that invested money might just vaporize as it did for millions of us in 2008. What if money became more valuable over time, without having to be invested? Or, rather than getting an extra job, what if you could get richer just laying on the couch? It would be as if you could put a hundred dollars under the cushion and two seasons of Arrested Development later, pull out $110; every time you went shopping you could afford a little more.

The idea seems to defy a law of nature. We’re even told to fear increasingly valuable money! If prices generally fall, experts tell us, it will lead to an economic catastrophe: the dreaded spiral of deflation where the economy goes into a prolonged shrinking phase. But is that really so? Except for during The Great Depression, no one living during the current or previous centuries has ever experienced generally falling prices. But if you asked 19th century Americans, they would have told a different story. For decades they benefited from generally falling prices and during that time the economy grew.

What we do experience is called inflation. I remember my introduction to the concept of inflation well. Back in my home town, there was an old fashioned burger and milk shake shop called Kreem Kup, where you could still get a real hamburger pressed with a wide spatula on a flat top grill. Once a year, on its anniversary, Kreem Kup sold everything for 1950s prices, which meant that I could buy a hamburger for 25¢ and a Coke to wash it down for only 5¢.

Folks like my dad, who lived through WWII and the post-war years, all understood inflation well and they had a pretty convincing explanation for it: We are all just a bit greedy and naturally always try to hike up prices when we sell things, which in turn results in other prices rising to compensate; wages rise in order that people can afford to keep spending more. An alternative view had it the other way around: High wages start the process and the prices of other things rise to make up for the increased labor costs. It really sounded plausible that our natural tendency to want more would inextricably lead us to getting less. That’s just the sort of depressing fact you must come to accept as you grow up and learn to shed your naïve optimism. Thankfully, it isn’t the slightest bit true. Really, it’s just an example of blaming the victim. And it’s circular reasoning, since it tries to explain rising prices by means of other rising prices. So what is the real explanation? That will become clear when you understand what counterfeiting is and what’s wrong with it.

Counterfeiting, legal and illegal

If you’ve paid attention you know that, in recent years, the so-called greenback has been gradually changing color. As of this writing, The Federal Reserve is hard at work on a dramatically overhauled 100 dollar bill. It utilizes color and sophisticated design elements in order to thwart counterfeiters. Why? Because with the advent of desktop scanners and printers, the potential for unlimited spending power came into the reach of all of us. It used to require a master craftsman and a printing press, but now it is child’s play to print knockoffs of old-style bills which can easily pass as beer money in a dimly lit bar. But why does the Federal Reserve care so much about keeping people from printing their own tender? Is it merely due to a cultural disdain for unearned gain?

To see, let’s imagine a counterfeiter has printed himself ten dollars in new money and spent it. He actually gets something for nothing (minus the cost of printing and the time and effort taken to create the bills). The shop owner, who exchanges goods for the new money, then deposits the new money in the bank. He is now $10 richer (minus the cost of the goods he traded) and he has not been harmed in any way, so long as the fake bills are not detected. But with each new transaction, the prices of products and services is bid up a little more, until the purchasing power of the newly introduced money is completely counterbalanced by the rising prices.

Eventually, the new dollars make their way to your grandmother in the rest home who spends it again. She has a fixed income, and by now her cost of living has risen at least ten dollars but her income has not increased at all. So what made the counterfeiter and the first ones who got his fake ten bucks a little richer, has made grandma poorer. In effect, the ten dollars was stolen from grandma to pay the counterfeiter! As for those who get wages, their salaries will eventually rise along with other prices, but wages always lag so we all feel the pinch of the counterfeiter’s actions. Grandma feels it much more though.

Counterfeiting is a very bad thing indeed, and it’s good for the government to go out of its way to discourage it, except for one thing: the biggest counterfeiter of all, is actually the Federal Reserve itself! As Ron Paul likes to point out, the actions of the Federal Reserve, create inflation and the effect of these actions is indistinguishable from those of counterfeiting, except far worse!

The Federal Reserve is able to control the supply of money; it can use this power to hold the supply where it is, or even withdraw money from circulation to slow the economy. It can also fan the fires of the economy by pumping money into the system to encourage spending and rev the economy up. And this has been shown by Austrian economists to be the source of the boom and busts that have been so disastrous for many people throughout the last two centuries. It seems there is rarely ever any need to tighten the money supply, and endless reasons to keep it growing. Among the many rationales for continual inflation, is the bugaboo of its opposite: deflation.

Your friend, deflation

The idea of deflation, with its effect of shrinking prices, sounds like something we should wish for. In bad times like The Great Depression, it was a blessing to folks who were out of work. Today, it would be a boon to the “underemployed” and to all of us. Nevertheless, some economists claim that it is a bad thing.

Inventor and futurist Ray Kurzweil, now the Director of Engineering for Google, complains that some economists have repeatedly dismissed his predictions of continued technological progress siting deflation as the reason. Since technological progress results in falling prices and falling prices ultimately result in a shrinking economy, innovation would no doubt fizzle. Computer chips may keep getting better and cheaper, but eventually people just won’t need yet faster machines and will quit buying them so often.

However, Kurzweil rightly retorts that the economists are not considering that faster computers can do different things than slower ones can. So people will buy tomorrow’s computers to help them do different things than they bought yesterday’s to do. Far from slowing, technological progress is actually increasing exponentially. Peoples’ needs and desires are infinite; as soon as a solution becomes feasible and economical, what were once mere wishes become demands. Shrinking prices will result in more economic demand, not less.

Demand deflation now!

Inflation is not our fault. We don’t create rising prices by spending too much or wanting higher wages. The continual pumping of money into the system is to blame, not us. This has an even darker effect than a devalued dollar and rising prices. The booms and busts which have repeatedly punctuated my lifetime, are caused by the increase of money which has the effect of diverting funds toward the production of capital goods at a time when consumer goods should be made in greater abundance. In this way, a bust, as in 2008, must eventually happen. Despite such dangers, we must invest our hard earned savings in a risky stock market just to earn a return grater than the rate of inflation.

Without the Fed and its monetary policies, prices could generally fall, as they did during the Industrial Revolution—and as they are doing in certain segments of the economy, like computers. Our standard of living could improve while we exert no more effort than before. Wouldn’t that be great?

The money printers are using the phony specter of deflation as an excuse for a policy of continual inflation, which is nothing really but counterfeiting by another name. They are stealing form the poor to give to the rich and robbing us all of some much needed relaxation!

Additional reading: What You Should Know About Inflation by Henry Hazlitt

May 7, 2013The Economy

Moore’s Law

Tracey ZoellerEqual pay for equal work, Eric Zicklin, Michael, Michael Moore, Moore, New Yorker, Trade union, Wage Leave a comment

According to The New Yorker, Michael Moore once misrepresented two writers as associate producers in order to skirt labor union compensation rules. Moore has a knack for drawing fire from both friends and enemies alike, so—not too surprisingly—his alleged behavior has provoked accusations of hypocrisy from the Right and greed from the Left. However, I will argue that what Michael did was actually a good thing.

Here is the anecdote as it was reported in an article published by The New Yorker in 2004:

One day during production on the first season of the show, Moore called two of his writers into his office. It was, for both of them, their first job in television, and they had been hired with the title of associate producer. They were not members of the Writers’ Guild, the powerful union for writers in movies and TV, and thus were not receiving health benefits, and would not qualify later for a percentage of video and rerun sales. “Michael said, ‘I’m getting a lot of heat from the union to call you guys writers and pay you under the union rules,’ ” Eric Zicklin, one of the associate producers, says. “ ‘I don’t have the budget for that. But if they keep coming down on me that’ll mean I’ll only be able to afford one of you and the other one’s gotta go.’

Michael Moore is a strong advocate of labor unions and denounces the ruthlessness of profit-hungry business. Given his views, his alleged actions may seem disappointing or even angering. But with the benefit of economic understanding, Moore’s actions look differently: Moore, like every other human, obeys the law of marginal utility.

The law of marginal utility reveals how we all employ scarce resources for the attainment of ends, and have to make choices between those means that we value more over those that we value less. If Michael Moore wants to make a TV show, he must have not only writers but also makeup artists and a camera crew. He only has a finite amount of funds with which to procure all of these things. If his costs rise, he will have to sacrifice some things in order to keep others. In the demand curve illustration we see that, at the original wage price, there is a demand for two writers. But at a higher price, the quantity demanded is reduced by one. Why? If writers cost too much, some other urgently needed thing will have to be sacrificed and the show may be put in jeopardy.

If the writers join the union and Moore lets one go, which one will it be? If we think of writing as a homogenous good, like eggs of the same grade, then each page of writing goes first toward the most urgent need—this week’s episode. Once there are enough pages of writing to cover the first episode, any more pages of writing will go to the next one and so on. Each week Moore must have at least enough writing to cover one episode. If writer A can output enough pages to cover a single episode, but writer B can only generate enough to cover part of an episode, Michael will fire B.

Now we can ad more detail to our graph. Before we could say that given increased labor costs, Michael would keep one writer and let the other go, but didn’t know which writer was kept on and which one was fired. Now, we can identify each writer with reasonable certainty. At the lower initial labor cost, Michael’s stock of writers is A, B. After the cost increase, his stock is A.

Even if one writer joined the union and thus cost Michael substantially more to retain, the other could keep his job provided he was willing to lower his own salary sufficiently to make up the difference. But if both writers belong to the union and must be compensated the same, one writer will have to go.

This is why free market advocates point out that minimum wage laws, or equal pay for equal work legislation, are counterproductive: They raise the wage cost of laborers least able to demand a high wage—precisely those that will be the first to be let go, or last to be hired, if costs increase. Minimum wages all but guarantee that the lowest-wage laborers lose their jobs or fail to get them in the first place. They steal from the vulnerable the ability to compete on the basis of price when their skills are not enough, or when they would not be hired because of prejudice.

Instead of pointing out his hypocrisy, or accusing him of greed, we should call attention to the good that Michael Moore was doing by giving his writers fake titles in order to save money: giving them both a chance to work.

April 12, 2013The Economy

Bitcoin Lessons

Kyle Stephensanarchists, bitcoin, currency, economy, federal reserve, libertarians, market Leave a comment

Bitcoins have been one of the currencies of choice for those looking to ‘buck the system’, providing a way for libertarians, anarchists, and others to circumvent the global Central Banking cartel while simultaneously utilizing the free-market aspects of the internet to engage in trade.

However, on April 10^th, 2013, Bitcoin holders saw the value of the virtual currency drop $100+ in dollar terms after climbing steadily for months from its $15 dollar value in January. (Boesler, “Bitcoin is Crashing”)

What caused this ‘crash’? How could a currency that is fixed in number terms gain and fall so dramatically? How can a near-‘Free Market (in reference to the internet) currency be subject to these things?

There are many aspects to the Bitcoin phenomena that can teach valuable lessons to libertarians.

Firstly, a firm/currency/good/service that is made available in the Free-Market or similar institutions such as the internet is not necessarily a perfect thing just because it is arrived at voluntarily or through the market. Many libertarians and anarchists tend to assume that any association or good that comes about through voluntary exchange in the Free-Market must automatically be good because of the efficiency of markets and lack of coercion. However, this is simply not the case: as for most things, there are always exceptions.

A man can work for the state and be a good man, and believe that he is doing good work. For example, many libertarians/anarchists might tend to think that all police officers are bad simply because they work for the state. This may be true with some officers but oftentimes it is not. If these same people worked in private security agencies under Free-Market conditions, the same libertarians would most likely approve of, and even look up to, these same men. It is important to separate the good from the bad in every market structure, mixed economy or not. Although the state does subsidize and allow for enhanced tyranny and corruption, it is simply dishonest and intellectually lazy to claim that it means that this is the case all of the time.

How does that relate to Bitcoins? Well, many libertarians and anarchists viewed Bitcoins favorably due to the fact that the state was not running the operation. This false assumption that Bitcoins were impervious to the same types of currency cycles that all other currencies go through (regardless of being centrally run or through the market) led many libertarians and anarchists to see their Bitcoin stocks implode within a day. (It is important to note that they still trade at a relatively high value, but a 50% fall in one day is obviously bad.)

Secondly, Bitcoins operate on a fixed amount, which is obviously quite different from the Federal Reserve’s elastic money supply. Elastic money supplies, contrary to what most libertarians believe, are not always a bad thing. Under free market circumstances, elastic money supplies would allow banks and currency holders to shift the amount of money in circulation to fit the demand for the medium of exchange in question as necessary. Banks that devalued their money too much would face currency holders abandoning ship; contrarily, banks that kept their money counts too low would not be meeting the demand of potential currency users, and therefore would need to adjust accordingly. Changes in population sizes or other structural changes in the economy would most certainly require different currencies and different currency amounts to suit the market.

That being said, currencies that are fixed in amount can serve as ‘safe’ currencies that check against and hold value for other currencies redeemable in it. For example, gold is relatively fixed in amount (fluctuations in gold supply are minor compared to most currencies that it used to be redeemable in.) For centuries, gold has served as a currency or commodity in which other currencies would measure against. Many markets accepted both gold and paper notes that could be redeemed for gold despite that one of the currencies was fixed and other, for the most part, was not.

Fixed currencies under freer markets can be god-sends and even hold whole economies together. However, markets dominated by central banking often move away from fixed currencies and commodities due to monopolized elastic currency heavily relying upon credit and debt expansion. Fixed amounts of gold do not serve monopolized currencies well due to the fact that there are no market checks on credit and the true demand for money.

The state, with a monopolized currency, is able to absorb power and property through money devaluation and debt enslavement. Under free market pretenses, elastic currencies would most likely not be able to lend out nearly as much money or devalue the currency to such a high degree as a monopolized institution could. Where a fixed currency in the free market may be able to give currency holders a way of keeping elastic currencies in check, it fails to keep up with the expansion of monopolized currency such as Federal Reserve notes.

Lastly, the Bitcoin boom and bust is clearly a market bubble. Some libertarians and anarchists forget that free markets are still subject to boom-and-bust cycles and that there would be tough times under the free market. So many of us have become accustomed to the state and its many failures and lack of success, almost to the point of blaming the state for everything wrong and praising the market for everything right. This is a dangerous way of thinking. Assuming that the market is always right can lead to downright apologism for free markets producing bad outcomes. Evidence does indicate that freer markets generally lead to higher standards of living; however, this does not mean that free markets (or free market entities) are always perfect.

References:

Boesler, Matthew. “Bitcoin Is Crashing.” Business Insider. N.p., 10 Apr. 2013. Web. 10 Apr. 2013.

March 20, 2013Liberty Movement, The Economy

Immigration: A Response

Ian Huyett 2 Comments

I began “Liberty: Why Right > Left” with a disclaimer: “The support of mainstream conservatives for authoritarian policies is a real and pressing problem.”

In his recent column on immigration, Alex provided an example of just such a policy.

Republicans and conservatives tend to favor solving the border security issues before the topic of the legal status of illegal immigrants in the United States even can be discussed. They are also generally against any mass amnesty (automatic citizenship) of illegal immigrants.

Alex went on to suggest that it would be prudent for libertarians to affirm national border enforcement. I’d like to quickly respond in the negative.

When I argue that it’s far easier to bring the average Republican to libertarianism than the average Democrat, I mean by “libertarianism” the full arsenal of libertarian positions – not libertarianism minus immigration.

This is an essential difference between libertarian strategies for outreach to the right and to the left. The latter tends to entirely disappear fundamental issues like gun control from its advocacy. On immigration, right-libertarians need not do the same.

Hoppe: Not So Pragmatic

In his column, Alex discusses the costs of illegal immigration to public services, alluding to the argument that open immigration is incompatible with the welfare state. Libertarians are likely familiar with this position thanks to Austrian economist Hans-Hermann Hoppe.

The problem with making advocacy in one area conditional on success in another is that the entire libertarian repertoire can quickly cancel itself out. Ann Coulter, for example – during her infamous Sossel appearance – suggested that libertarians should forestall the decriminalization of drugs until the welfare state has been abolished (lest taxpayers be made to finance drug abuse).

By this logic, however, libertarians in 1933 ought to have opposed the repeal of alcohol prohibition. That would make the liberty movement less libertarian than FDR.

Certainly, some libertarians loudly oppose drug laws but never dare criticize the welfare state; against these people, Coulter’s concern is a fair point. Yet if libertarians who are outspoken on both issues ought to abandon one, the whole prescriptive worldview collapses into incoherence.

It’s easy to see how libertarians who followed Coulter’s thinking might find themselves ironically defending big government in most areas – as, tellingly, Coulter herself does.

Localism is Better

When Ronald Reagan called libertarianism “the very heart and soul of conservatism”, he pointed to a shared desire for “less centralized authority”.

When authority is not centralized, of course, communities have the right to manage their own internal affairs. Said Russell Kirk:

Conservatives uphold voluntary community, quite as they oppose involuntary collectivism. Although Americans have been attached strongly to privacy and private rights, they also have been a people conspicuous for a successful spirit of community. In a genuine community, the decisions most directly affecting the lives of citizens are made locally and voluntarily… But when these functions pass by default or usurpation to centralized authority, then community is in serious danger.

Apply this conservative principle to immigration, and you’ve answered all of Alex’s concerns. If a locality wishes to welcome all newcomers on the one hand and liberally provide welfare on the other, let them – but also, let them shoulder the costs, rather than displacing them onto people not represented in the decision.

Over time, the market of competing solutions would pressure local governments to neither provide universal cradle-to-grave services nor exclude immigrants for ridiculous reasons (like because they’re Hispanic).

On both immigration and welfare, then, libertarians ought to simultaneously advocate decentralizing decision-making to local governments. This strategy would appeal to a conservative tradition while allowing Hoppe’s problem to solve itself.

If my suggestion sounds too dogmatic, note that a former Speaker of the House has proposed much the same thing.

[He] is for the idea of a local community review board, where citizens can decide whether or not their neighbors who have come here illegally should find a path to legality.

To Alex and the many libertarians who share his sentiments, I’d suggest that we should all be at least as libertarian as Newt Gingrich.

March 12, 2013Liberty Movement, The Economy

Liberty: Why Right > Left

Ian Huyett 6 Comments

“Legislators and revolutionaries who promise equality and liberty at the same time are either psychopaths or mountebanks.”
Goethe

To cover this expansive topic as efficiently as possible, I’m going to begin by clarifying my position with two points.

I. Firstly, allow me to preempt those who might respond simply by naming some horrendously statist position that many right-wingers support.

The support of mainstream conservatives for authoritarian policies is a real and pressing problem, and I am not suggesting anything like the contrary.

I’ve written quite a bit against the prohibition of drugs, prostitution, and all manner of libertine pastimes. These issues are not trivial. Libertarians should not abandon them. I will happily affirm my libertarian stance on them in front of a group of elderly Rick Santorum supporters or whomever you wish.

I do say, however, that I could do so in a way that many of them would find appealing. Moreover, I maintain that I’ll have far more luck convincing the Santorum supporters to decriminalize hard drugs than you will convincing an equivalent bunch of Obama supporters to let you own an automatic weapon.

Think about it for two minutes. I’ll tell my audience “the government should not punish taxpayers to protect drug users from making poor choices in their own homes”. What will you say?

Invoke slave rebellions or whatever historical event you like. In their eyes, the government has never truly been the primary antagonist. The government didn’t enforce slavery, they imagine, so much as it allowed slavery to occur. The problem was never that the government did too much, but that it did too little. Mainstream leftism, in the very marrow of its bones, is the ideology of the modern state.

Then again, I may be giving you too much credit. You probably wouldn’t even broach the subject of gun rights with the Obama supporters. You’re not ‘that kind of’ libertarian, after all.

II. My argument that leftism is comparatively statist by nature assumes two relationships – one between egalitarianism and the left and another between non-egalitarianism and the right.

By egalitarianism, I mean the descriptive position. I do not mean a preference for equality of opportunity, especially given that most egalitarians are A-okay with 8-to-1 racist discrimination. On the contrary, I mean someone who is inclined to view unequal results as proof of unequal opportunity.

This association is well-supported. Karl Marx repeatedly predicated his ideas on the notion that humans were blank slates – excepted from the laws of nature via egalitarian fairy dust. For example, he sought to bring about “the disappearance of all culture” and to “abolish countries and nationality”. He promoted the “abolition of the family”, a unit that “will vanish as a matter of course when its complement [capitalism] vanishes”.

These were viable goals to Marx precisely because he saw no innate human predisposition towards favoring one’s own community or family. He even criticized those who would “transform into eternal laws of nature and of reason, the social forms springing from your present mode of production and form of property”.

Conversely, figures from Paul to Burke to Kirk anticipated the action of nature upon human behavior. It is this conclusion’s steady affirmation by modern empiricism that Marxists have built an entire ivory tower of pseudo-philosophical ‘anti-scientism’ to escape. Moreover, it was vital to the survival of their ideology that they do so.

There is a reason Murray Rothbard described egalitarians as “spoiled children”, “profoundly anti-human” and “profoundly evil” creatures who have “a fair chance of destroying the very universe that they wish to deny and transcend”. Egalitarianism, necessarily, justifies the violence of the state.

Suppose that a maximally libertarian society has been achieved. Because humans, contra Marx, are not magical blank slates, people will continue to produce different results in different areas. Women, at least by way of getting pregnant more often than men, will continue to spend comparatively less time working and consequently tend to earn less than men in the same jobs.

To anyone who subscribes to something like the Kirkian principles of imperfectability and variety, all is well. To an egalitarian, however, the varying per capita incomes of men and women constitute prima facie evidence that women are being robbed or defrauded via an insidious patriarchy. An egalitarian who compensated women using a system of corrective redistribution would therefore simply be defending women from theft. If egalitarianism is true, in fact, it would be un-libertarian not to continually take this money back from the hegemonic thiefmen – creating a de facto state.

From pogrom era anti-Semitism to progressive taxation, Westerners have cloaked violence in virtue by assuming that anyone who is better at something than someone else must have cheated somehow. By casting government violence as defensive rather than offensive, egalitarianism serves as the best possible moral justification for statism.

When egalitarianism is dismantled, the state’s veil of legitimacy is removed and it can clearly be seen as simply initiating force against innocent people. It’s for this reason that I believe conservatives are, in the generality, far more amiable to liberty – even in areas where we might expect more success with liberals.

War

You don’t need to go back to the Old Right to find a tradition of right-wing non-interventionism. Revisit 2000’s Bush-Gore debate and you’ll clearly see a Democratic Party that wanted to police the world more and a Republican Party that wanted to police it less.

Like many libertarians, I didn’t watch this debate when it aired because I was 10. Instead, I was given a warped education in foreign policy by the post-9/11 triumph of Cheney-style neoconservatism. Having come into politics under the Bush Shadow, my generation has, perhaps, a more skewed understanding of the left-right spectrum than any other in American history.

Young libertarians expect to connect with the left on foreign policy because Bush is still blocking our view. We don’t stop to ask ourselves why the Bush-era anti-war movement totally vanished after an even more interventionist president came to power.

I propose that the anti-war left we think we remember never really existed. It was populated largely by people who imagined that Bush was Reagan Come Again and posed a threat to their redistributive programs. Moreover, if you think hard, you’ll recall that alongside criticisms of the Iraq war as oil-driven, one could often find creepy implications that countries other than Iraq much more urgently needed to be invaded.

Sure enough, as conservatives show signs of returning to non-interventionism, the left has returned to its more overt internationalism. Even at the height of American support for the Iraq War, I don’t imagine that many College Republicans were chalking “Hussein 2003” around campus. Yet, at my university, “Kony 2012” chalking abounded after a viral internet video harkened back to a certain English poem.

C.S. Lewis’ observation that “It may be better to live under robber barons than under omnipotent moral busybodies” is here especially relevant. Even the most bloodthirsty right-winger will be satisfied when all potential threats to their nation have been eliminated. The bloodlust of the New Left, however, will only be satisfied when there are no more Joseph Konys – in other words, never.

Leftist warmongering is infinitely more dangerous because it immutably denies the very “structure of reality”. Its passion can never be reasoned with and its violence never exhausted. Unlike Cheneyite jingoism, its goal cannot, in even the remotest of possibilities, be attained while free human beings still live on the Earth.

Social Issues

I received some enlightening feedback when, in 2011, I argued in my school paper that prostitution should be decriminalized. I wrote:

In 2005, a Yale behavioral scientist trained a group of capuchin monkeys to use money. To receive food, monkeys had to turn in coins that visionary Keith Chen provided them. Trading in more coins meant getting more food.

It wasn’t long before Chen observed male capuchins paying females for sex. It got so bad that Chen had to separate the monkeys. “It wouldn’t reflect well on anyone if the money turned the lab into a brothel”, said a 2005 New York Times article on Chen’s research.

Even among monkeys, trading sex for resources doesn’t seem to be a novel idea. In 2008, Animal Behavior published a paper called “Payment for Sex in a Macaque Mating Market”. It showed that, in the world of Indonesia’s wild monkeys, the going rate for paid sex increases when the number of available females declines.

Prostitution cannot be blamed on our media or culture; it is older than either. Prostitution is natural. It is an inevitable consequence of our ability to fulfill basic needs through negotiation.

When I argue that a particular behavior is natural, people often spuriously assume that I’m offering a moral defense of the behavior. On the contrary, it’s simply more prudent to recognize that a behavior is likely to occur than idealistically insist it be made to disappear.

As far as academic institutions go, mine is reasonably conservative. Most of the opposition my column received, however, came from self-styled feminists. They asserted that, whatever my monkey studies might indicate, no human woman could possibly wish to be a prostitute. That some women are prostitutes, then, is proof that they’ve been forced into the profession and require the salvation of legislation.

My critics used an egalitarian assumption of sameness to justify government imposition of a personal choice. To them, criminalizing prostitution is not the offensive action that libertarians suppose it to be, but a defensive reaction to artificial inequality.

Notably, I did receive one email from a concerned Christian. He proposed that legalizing prostitution would weaken the family. I replied with something to the effect of “Are you suggesting that, if prostitution became legal, good husbands and fathers would patronize prostitutes? That good wives and mothers would become prostitutes? Anyone that would engage in prostitution, were it legal tomorrow, is not of good moral character today”. He conceded that I’d raised a good point and we went on to have a pleasant exchange.

This latter respondent, like myself, subscribed to the principles of variety and imperfectability – and they ultimately worked to undermine his social authoritarianism. Conversely, the opposite principles – sameness and perfectibility – supported the social authoritarianism of my feminist critics.

Moreover, even where liberty and the left are potential allies on paper, they are enemies in practice. To a libertarian it is certainly a condemnable injustice that gay couples, for example, are often subject to a different tax code and can be prevented from visiting one another in the hospital.

The politically correct left, however, does not particularly concern itself with these areas. Instead, it leaps straight to expelling businesses and prosecuting people over personal opinions.

On those issues where it could comfortably advance liberty, the left soon regresses into its authoritarian comfort zone. It is a machine that simply lacks the hardware to increase freedom.

Since 2003, there have been no laws against sodomy in the United States. In 2013, however, it’s illegal to say “sodomite” in Canada.

Gun Rights

In any search for potential libertarians, the right to own a weapon should be a central focus. The maintenance of any other freedom imaginable, after all, is entirely contingent on the right to defend it. It’s difficult to start a business, for instance, if you’re dead.

Consequently gun rights, more than any other single issue, are a good general indicator of one’s inclination towards liberty.

After the Aurora massacre, the repulsively archetypal Jason Alexander opined “a crowd of people firing away in a chaotic arena without training or planning – I tend to think that scenario could produce even more victims”.

Alexander felt, apparently, that it’s better to let a massacre of children run its course unopposed than risk “making things worse” by allowing an action with the potential to stem the slaughter. I find it difficult to imagine a more thoroughly evil or less libertarian position.

Likewise, Democratic State Senator Evie Hudak recently told a rape victim “chances are that if you had had a gun, then he would have been able to get that from you and possibly use it against you”.

Whenever I hear some libertarian suggest that leftists are our natural allies “on social issues”, I think of comments like these. It doesn’t matter one iota if gays have the right to marry if they don’t have the right to live. It doesn’t matter if a woman has the right to make decisions about her body if she has no ability to decide who has access to it.

Gun rights may be the only issue on which Republicans are consistently better than Democrats, but it’s the most fundamentally important issue there is.

Allie Young – who was wounded in the Aurora shooting and survived – was one of my residents at KSU while I worked as an RA. In a recent interview, Young said “I don’t think gun laws would help… I got my concealed license a month after everything happened to me. I’m very strongly convinced that people kill people, not guns”.

Government is not the best answer, Young seemed to think, when people are the problem.

On the other hand, if people are never the problem, government invariably becomes the solution.

March 4, 2013The Economy

The Minimum Wage Fallacy

Kyle Stephenseconomics, economy, minimum wage, Obama, state of the union, supply and demand 5 Comments

How Obama’s Proposal Will Have Unintended Consequences

In the recent State of the Union Address, President Obama proposed a new solution to the rising poverty rate: a $9/hr federally-mandated minimum wage.

The declaration garnered a positive response from the crowd, and the public in general. Surely, this will solve the issue of poverty, right?

What President Obama, Congress, Keynesian economists, and many others choose to ignore is what kind of implications a wage floor can have on the economy. To explain these ramifications, we must first delve into the economics of labor supply and demand.

The Supply and Demand for Labor

Labor, as well as everything else in the economy, is subject to the laws of supply and demand – that is, the demand for a good or a service, as well as the supply of such goods and services, will work towards market equilibrium, maximizing efficiency and setting a market price. The market price signals to businesses and consumers alike the actual costs of what is being made available, be it food, shelter, clothing, luxuries, and labor. What many Keynesian/Liberal economists will have you believe is that labor is somehow outside of these laws, and ergo it is not subject to these laws; yet, labor is a service, which a business must purchase for it to operate (just as a business may have to purchase the services of a carpenter or an electrician, the business must also purchase your labor from you, and it is calculated as a cost in the business’ spread sheet.) Just as all services have a market price, so does your labor.

Consequently, when a price floor is established in the labor market through the passage of minimum wage laws, excess supply of labor is created. Businesses are not willing to hire as many workers for a higher price, and thus, cut down on the number of laborers they “purchase” in the labor market. If, say, the market price is $5/hr for unskilled labor, and a minimum wage price-floor of $10/hr is instituted, then firms will only be able to hire half of the number of workers that they would otherwise employ. This example, albeit simple, is exactly the type of an effect any type of price-floor has on the economy. The business then faces a tough decision: Do they hire less workers? Do they fire some workers and keep costs the same, but lose production-capacity? Do they “eat the costs,” so to speak? Do they push off the costs onto the consumers?

How Adjusting For Inflation Won’t Work

There is a common argument made for the minimum wage that entails raising the base wage that workers must be paid in order for them to keep up with the rising costs of living (due to inflation.) At first, this sounds like the right thing to do: if the wage is increased at the same rate of inflation, then true costs will not rise, correct?

Wrong. Inflation is a tricky thing; it distorts the prices in a market, which act as signals to people and firms about the supply and demand for various goods and services. There are three inherent flaws in adjusting wages for rising inflation:

A) The way that the BLS calculates the Cost of Living Adjustment (C.O.L.A.) is flawed. The rise in prices that are monitored in the COLA are based upon a fixed basket of common goods, which composes the Consumer Price Index (CPI.) The issue with monitoring this same basket of fixed goods is that the various inflation rates of these products (apples may rise 33% opposed to bananas only rising 24%, for example) is that consumers typically substitute cheaper goods for goods whose prices rise significantly. Joe Consumer may consume less apples and consume more bananas, so he wouldn’t be spending nearly as much money as the CPI would make it out to be. This misleads government officials and distort Social Security payments and other forms of welfare all the time; one can make the assumption that the wage rate would follow the same path. It may be that the Government would overcompensate or under-compensate workers for their wage, because they would have no true way of knowing what the right wage-floor should be.

B) Different regions experience different prices. California is notorious for its high gas and housing prices, opposite of North Carolina, which has a relatively cheap cost of living compared to the Golden State (no pun intended.) Making a blanket minimum wage for the entire United States disregards these differences, and may pay Californians too little and pay workers in North Carolina too much (and by too much, I imply that workers who would otherwise have been employed in North Carolina would be out of the job while others are overcompensated.) As it was established before, absent of a price-floor for wages, these regions would have their own relative equilibrium wages, accounting for the relative supply and demand for labor in those places. Therefore, adjusting for average inflation across the United States will not account for the differences in prices in the various regions and markets.

C) Most importantly, adjusting the minimum wage subject to inflation rates does not account for how businesses interpret Revenues and Costs. Again, prices act as signals to firms and consumers about the relative supply and demand of goods and services in the market. Higher labor costs signal to firms that it is costly to hire workers and that it would be in their own self interest to scale back on their demand for labor (just as a consumer would scale back on their consumption of an expensive product, it works the same way.) Costs for a business are much like costs for a consumer in that they both interpret higher costs as a function of supply and demand, and not as a function of inflation of the money supply. Although inflation of the monetary base may be causing a higher asking price for labor, businesses will most likely view this as either a drop in the supply of labor or an increase in the demand for labor by other firms. This is how the business will interpret its costs. Where it gets interesting is in how businesses interpret their revenue. Inflation of the money supply will increase the amount of money chasing the amount of goods in the market-for businesses, it will appear as though demand for their products has actually increased, when in reality, it has actually stayed the same. The lag time it takes for businesses to increase their prices to match what they think is an increase in demand causes firms to interpret the higher revenues as just that-higher revenues-and not inflation of the prices due to an increase in the money supply. This creates the disconnect between wage rates and selling prices: the business will interpret its higher labor costs as an increased demand for labor in the market, while simultaneously interpreting the higher revenues as an increase in demand rather than inflation. Why is this important? Businesses will react to a minimum wage (even if it is adjusted for inflation) as a price floor, and not a shift in prices as a whole. This will cause an excess supply of labor, unless the new wage is precisely what the equilibrium price for labor would be absent of the regulation. Even is the latter is true, it still would not allow anyone to be hired below that level, however menial the task. These jobs would otherwise prove beneficial to the market, but are nixed in the name of fairness.

Who is Affected by Minimum Wage, and Why

Believe it or not, a minimum wage affects everyone. Although one may not experience the affects of a minimum wage directly, they will experience higher prices at the stores they patronize and the services they buy. No matter which path a businesses chooses, it is almost guaranteed that the prices of their product will rise. If the business decides to cut their work force, their production-capacity will fall, and thus the supply of the good or service they make available will be smaller, causing them to charge a higher price. If the business chooses to just “eat” the cost, then their profits will suffer, and they will have a harder time financing their businesses and increasing production in the future (which will most likely cause a rise in prices in order to finance any future business ventures.) Clearly, the imposition of a minimum wage on the labor market affects consumers and businesses alike.

But, what of the workers? How does a price-floor on labor affect them? Well, some workers will be better off, in that the lucky few who are allowed to stay under the payroll will see a definite boost to their income; however, these are the workers who are more efficient and offer their employers more production. Such workers would most likely be in line for pay increases anyways, given that they provide enough of a benefit to the business that they should be compensated for their added efficiency. What is not seen is the teenager or the unskilled worker who would be more willing to accept a lower wage in exchange for the ability to acquire useful skills and increase their own worthiness. These workers are dependent upon the availability of low-skill low-wage jobs that exist outside of a hampered market-these jobs lay the foundation from which their skills and their résumés are built upon.

The Vicious Cycle and the Actual Solution

Now, as one can see, the imposition of a price-floor on the labor market has some dastardly effects on prices and employment. The next step for the state, naturally, is to blame businesses and the market about the increased inefficiency, rather than recognizing the inherent flaws of the Minimum Wage. This brings many politicians to adopt even more radical policies or market alterations that further exacerbate the existing problems in the economy. No matter how it is spun, all workers will not be able to enjoy low prices and high wages. Where true economic improvements are made are in the increases in production capacities of firms that drive costs down and makes more available. Increasing labor costs for businesses by raising the minimum wage hampers their ability to increase their reinvestment. Many are unable to recognize this, and only think of the economy as a single pie that must be divvied up and spread around. If this was true, then the production capacity of cavemen in the early days of human history would be the same as today, since their would only be X amount of work and production that could take place. The truth is that work and production capacity is nearly limitless, and has to be improved upon with reinvestment and innovation. Where the focus should be placed is in the Federal Reserve and how the inflation of the monetary base is leading to many of the problems we are experiencing in the economy today.