You are here

Economically Illiterate Social Democrats and Liberals

Today's headlines demonstrate that liberals and social democrats can also be economically illiterate idiots. Two states just passed laws to double their minimum wage. Doubling the minimum wage overnight is going to cause a shock to the system and cause tons of people to be displaced. Also, we might expect to see the absurdity of two-way migration, as jobs leave as companies move to states where they can pay lower wages and workers migrate to seek higher wages in these states (but can't find jobs after moving).

(The following discussion was between Wes Whitman, Lev Lafayette, and Fred Foldvary)

Lev Lafayette As much as I am in favour of minimum wage increases, this is not sensible.

Fred Foldvary You think a higher minimum wage is better for employment than a higher earned-income tax credit that provides the same income?

Lev Lafayette Fred Foldvary Good question. I am, of course, in favour of a high tax-free threshold on wages (which I guess is more of the same thing). For minimum wages I see them as a counter to a monopsonistic labour market, which produces wage levels which are lower than what is socially optimal and therefore lower productivity, less trades, and unemployment (although minimum wages do cause unemployment in the particular industry where they are located, *if* the task can be automated... which is a good thing as well)

Wes Whitman Universal basic income is a much better solution than a minimum wage.

Lev Lafayette How does that help unequal negotiating power between employer and employee?

Wes Whitman If you have a guaranteed income, sufficient to live on, then you don't have to take any job to survive. The power is shifted to labor. If the wages aren't high enough, you can walk away at any time. With UBI, workers have a guaranteed income, so employers have to offer decent wages in order to find people willing to work for them.

Lev Lafayette Yeah that bit is self-evident. Doesn't change the market power of few buyers and many sellers. Whilst I thoroughly support UBI I also support minimum wages in nearly all industries. (There is a few tech jobs were buyers of labour exceed sellers of labour)

Fred Foldvary There is no labor monopsony other than for military work.
Fred Foldvary Full employment prevents labor exploitation.

Wes Whitman How do you propose to maintain full employment? I'm pretty sure job guarantee program is the only way to do that, but I'm not really fond of the idea.

Lev Lafayette Fred Foldvary That's true, but most labour markets are in imperfect competition and they're a lot closer to monopsony more that perfect competition. That has a serious issue for wages and aggregate wealth.

Fred Foldvary Wes Whitman A pure free market would have full employment, as there would be no taxes on employment, there would be no minimum wage, and no arbitrary restriction on self-employment. So anyone with a positive marginal product could get employed. The self-employment option would prevent monopsony.

Wes Whitman A purely "free" market (laissez-faire) would quickly lead to the immiseration of the proletariat, just as Marx predicted. Pure competition tends to push prices down to the lowest level possible. Wages are the price of labor. Pure competition under laissez-faire would push wages down to the subsistence level. In order to have high wages, you either need a high minimum wage (as with Switzerland) or high marginal tax rates on top earners (as with the Nordic countries). Also, self-employment is only an option if everyone is guaranteed a share of ownership in productive property—i.e. if we have a property-owning democracy or a distributist economy.

Fred Foldvary In a pure free market, wages cannot fall below productivity. It is possible that the margin of production would go to a wage level at subsistence, but the output above the wage goes to rent, which would be equally distributed, preventing poverty.

Lev Lafayette A pure free market is rarer than a unicorn. There is not a market on earth than can even possibly fulfil its preconditions. No barriers to entry or exit? So many buyers and sellers that nobody can influence prices? Perfect, or even equitable, information among all buyers and sellers?

It does not, and cannot exist. Its value as a theoretical construct is for an abstract model from which one modifies for real-world conditions. Imperfect competition is the model that should be used. It reflects reality.

Fred Foldvary You are conflating a free market and the market structure model of perfect competition. The four market structures in conventional economics are 1) perfect (or atomistic) competion, 2) monopolistic competition; 3) oligopoly; and 4) monopoly. "Imperfect competition" refers to #2 and #3, meaning that the firms do not have a complete absence of pricing power.

Lev Lafayette Fred Foldvary Yes, I am well aware of the market structure continuum and I am conflating "perfect" and "free" because a "free market" that is not in perfect competition certainly isn't "free" in the positive sense of the word.

Any other use of the term "free market" will be unfair to those who are at a market disadvantage and is really just an ideological term for the powerful to further strengthen their advantageous market position.

Fred Foldvary Lev Lafayette Freedom means an absence of imposed restrictions and costs other than to prohibit coercive harm. Monopolistic competition can be in a free market if there are no taxes or imposed controls.

Fred Foldvary > Freedom means an absence of imposed restrictions and costs other than to prohibit coercive harm.<

That's just negative liberty.

A unregulated ("free") market inevitably leads to harm (whether coercive or otherwise) and in this particular context, by underpaying workers from what is the optimal market level (which, of as you would know, leads to a loss in aggregate productivity, and all that follows).

My conflation of free and perfect markets in this context, by the way, is based on your description wages under what you called "a pure free market". The description you provided is indeed true - but only under perfect competition, as following accurately describes:

Fred Foldvary Lev Lafayette I did not write that. I would never write anything this sloppy: "Under perfect competition, equilibrium wage rate is determined where demand for labour is equal to supply of labour." Also, as an American, I spell it "labor".

Lev Lafayette Fred Foldvary This is exactly what you wrote:

"In a pure free market, wages cannot fall below productivity."

Obviously, this is not true. In perfect competition however, it would be.

Lev Lafayette > I did not write that. <

I never said you did. I said:

"The description you provided is indeed true - but only under perfect competition, as [the] following accurately describes:"

Fred Foldvary In a pure market, if an employer pays a worker less than his marginal product, the worker quits and either finds better employment or else becomes self-employed. I don't see how perfect competition differs from monopolistic competition in the market for labor. Either both are wage-takers, or else the negotiating power is similar.

Wes Whitman Yes, precisely, just as you said... "In a pure market" under pure competition. This is completely different from a free market, where there is never pure competition. Consequently, your analysis absolutely does not hold for any real market.
Lev Lafayette The only "pure market" is perfect competition. Yes, in perfect competition, a labourer will receive a wage equal to the marginal revenue productivity (in the long run). You are absolutely correct in that regard. And that would be a free market, too. Indeed it is really the *only* free market that's worth defending.

However most labour markets are not like that. Most labour markets are in imperfect competition where the market power is almost always in the hands of the buyer of labour rather than the seller of labour (many sellers, few buyers). In those circumstances, the labourer will receive a wage less than the marginal revenue productivity.

(I will acknowledge that there is a few technical trades were there are more buyers of labour than sellers, but this is relatively rare)

Wes Whitman There are two uses of the word free. The liberal usage: absence of interference. The republican usage: absence of domination. According to classical liberalism, a market is free to the extent that government does not interfere. According to republicanism, a market is free to the extent that regulation prevents domination. The republican conception is more in line with ordoliberal and social market economy conceptions of a free market. This is in contrast to the right-libertarian (liberal) conception of free markets as one where government mostly takes a "hands off" approach.

Fred Foldvary What I mean by a "pure market" is the absence of government intervention, i.e. taxes that stifle, subsidies, mandates, and arbitrary restrictions.

Fred Foldvary Lev Lafayette If the next accountant can generate $50 per hour of output, then if he works for a farm in atomistic (close to perfect) competition, his wage is $50. If an insurance company in monopolistic competition hires him, he would not work for less than $50, since he could work for the farm instead, or become self employed in the monopolistic competitive market for accounting services. If there are fewer insurance companies than farms, the wage still equilibrates to $50. What matters is worker mobility and marginal product.

Lev Lafayette It's unfortunate that you have to construct a an example that is so close to perfect competition in order to claim that it is actually monopolistic competition (and weirdly, bringing opportunity cost into the equation - that's normally an obvious given.

The degree that the a good is not a perfect substitute for another good, and the degree that there are barrier to entry and exit, and the degree that there is imperfect information, is the degree that imperfect competition exists and to the same degree that the market operates more towards a monopsonistic labour market. It's basic calculus.

Commenting on this Blog entry will be automatically closed on April 17, 2019.