Re: On Minimum Wage, "show me the equity" →
After receiving a few messages today regarding the minimum wage, I thought it worthwhile to offer a brief summary of the argument. (For a bit more detail, please see my post Repeal the Minimum Wage.)
The premise can be understood in one sentence: you set a price floor for anything, you create a surplus of supply.
When it’s a price floor on hirable labor (aka a minimum wage) - you get a surplus of hirable labor (aka unemployment).
laliberty
please tell me what happens when the ‘market clears’.
It is when a good (or service) reaches its equilibrium price, courtesy of consensual and mutually beneficial exchange. The market is a discovery process, and prices are merely the natural result of the multitudes of independent exchanges expressing individual preferences. A market, then, is said to “clear” when the demand and supply find relative stability, and satisfaction of consumer desires is thus maximized. Prices set outside this process, such as a minimum wage determined by a central planning state, are necessarily arbitrary, since there is no standard against which they can be said to be correct or incorrect.
what happens to those who would have been willing to work at a higher wage?
You mean the entire human race? Can’t imagine too many individuals who aren’t “willing to work at a higher wage.”
are they not unemployed?
Only if they are, in fact, unemployed.
or are they just not officially unemployed, having been so discouraged at the lack of jobs that cover basic expenses that they don’t even bother looking?
For these unfortunate individuals at the margin, it is the minimum wage that makes them “officially” unemployed; so some earnings are better than no earnings (a preference that is made clear once the individual performs the action of accepting a given job). Plus, once the hurdles of interventionism are removed, competition will ensure that prices reflect the new “savings” of lowered wages, making the necessities the now gainfully employed individual would like cheaper.
and what about notions of fairness?
What’s fair about a third party using aggression to interfere in the voluntary, peaceful, and mutually beneficial exchange of others? And, to be sure, every free market exchange is mutually beneficial. Every participant values what he receives more than what he gives up, otherwise the exchange would not take place as there is no state gun to anyone’s head threatening him to act against his will.
is it not fair that a business entering into a contract with someone for that person to spend a day working for that business, to offer in exchange a wage that covers all that day’s expenses? from travel to board to sustenance to leisure?
What’s fair is for every party in an exchange to only give up what they are willing to, and nothing more.
or do we live in a society where we all see with how little we can get away with paying, or how much we can get away with when entering into any contract, any relation with other people?
Have you ever walked into a store and offered more than the asking price for any item? Have you ever opened a menu and thought, “This is an unfair price! I must pay them double!” Or do you, more often than not, understand that wealth saved at one location can be placed toward another desire elsewhere? Negotiations and haggling aren’t taking advantage because all parties are free to simply walk away if the offers are no longer beneficial. No one’s stopping you from paying more, of course. You are free to be as generous as you please. But the market-clearing price is about fairness not charity. Both parties in a given exchange are always trying to give up less than they receive in order to maximize their material or psychic profit. Meanwhile, the existence of competitors ensures that no one is unfairly overcharged or under-compensated. This is true for all exchanges, even labor. The fact that most people employed today - that is, approximately 95% of all hourly-paid workers in the U.S. - actually earn more than the minimum wage proves that employers must and do compete for labor.
if that is the society we live in, laliberty, why do you wish to reinforce it by abolishing the minimum wage? is that society not just a little worse to live in? a little less safe as people trust each other a little less? a little unhappier as some worry about having a little less?
Let’s consider the previous post on your blog. It says simply, “why do we not stand up to the bully?” and you tagged it “non-violence.”
Now how do you comport that sentiment with your above lament? How can you be against bullies and violence when you clearly advocate for a bully, the state, to use its monopoly on force to threaten violence on individuals if they don’t concede authority over their private decisions.
You speak of society, but what is society? Is it not merely individuals and their consensual interconnected relationships? Well, that’s all the free market is: individuals interacting. If we insert violence into these relationships, even for some purported greater good, we’re already off to a bad start. How can you suggest that your way, with this third party leviathan that inserts itself into the personal decisions of others (usually at the behest of “special interests”), is one that fosters more trust and happiness?
To the contrary, allowing no interference in the peaceful and voluntary interactions of people ensures every exchange is mutually beneficial, and as such we would all be wealthier and more free (which no doubt would lead to greater happiness and, when all individuals enter every exchange with the same power to walk away, greater trust).
I understand your concern. You and some others like you who support the minimum wage are disturbed by the conditions of the poor. (Though there are many - among them racists, xenophobes, and labor unions - who support a minimum wage for strictly selfish purposes). But a minimum wage does not solve these problems. It only makes those very same poor carry a disproportionately heavier burden.
I can, of course, point to no shortage of Austrian and neoclassical literature expressing my problems with minimum wage. But even some Keynesians once understood this…
Paul Samuelson expressed this succinctly:
- “What good does it do a black youth to know that an employer must pay him $2.00 an hour if the fact that he must be paid that amount is what keeps him from getting a job?”
Also, James Tobin:
- “I am against minimum wage legislation and have said so. It diminishes job opportunities, ceteris paribus, and it is an inefficient and haphazard tool for income maintenances or redistribution.”
- “People who lack the capacity to earn a decent living need to be helped, but they will not be helped by minimum wage laws, trade union wage pressures, or other devices which seek to compel employers to pay them more than their work is worth. The more likely outcome of such regulation is that the intended beneficiaries are not employed at all.”
This should be uncontroversial: if you truly care about the plight of the poor, you must not support a minimum wage.
The Scarcity of Time
A lot of people seem to think that if we could solve the problem of scarcity, all of a sudden economic issues would be solved. In other words, if we had infinite resources everyone would have access to as much as they wanted and everyone would be happy. But this isn’t true.
I think I can explain the point by describing my brother making breakfast in the morning. Monday through Friday I’ll wake up and go out into the kitchen and see my brother making breakfast. He always makes a basic egg and cheddar cheese omelet and after he’s finished he goes to work. However, his breakfast routine changes on Saturday and Sunday. In addition to his egg and cheddar cheese omelet, he also adds sliced vegetables and meat as well.
So exactly what’s changing his action between the weekdays and the weekend? Technically speaking, his resources are plentiful. He has access to the same ingredients Monday through Friday as he does on Saturday and Sunday but his meals are still different. The factor that’s determining his action is time. Even though he has an abundance of resources (ingredients) all seven days of the week, time is determining the amount of labor he allocates towards preparing his breakfast. On the weekdays he wants something simple and filling before work and on the weekends he wants something a little nicer with more ingredients since he doesn’t have to leave the house earlier to make it to work on time.
Sure the world would be a better place if resources were infinite but there’s still the issue of time and some people don’t seem to understand this. Maybe this helped clear things up.
Indeed. But to clarify, it’s not simply that his desires or demands shift on the weekends - he’d no doubt like those veggies and meat in his omelette on the weekdays - it’s that his preferences adjust based on the opportunity cost of adding those extra ingredients to his omelette. On the weekdays, because (again) his time is scarce, he’d either have to give up a few minutes of sleep or be a few minutes late to work. By choosing a more basic omelette on weekdays, his action reveals his preferences: he’d rather skip the extra ingredients and sleep in/get to work on time.
I’ve mentioned time as the scarcest resource before (most recently in my Money and Speech post) but Rothbard kicks off chapter 1 of Man, Economy, and State explaining how the scarcity of time leads to the development of preferences which leads to action. Time, after all, is the one resource that must be used as a means to attain all ends.
This is fundamental stuff:
All human life must take place in time. Human reason cannot even conceive of an existence or of action that does not take place through time. At a time when a human being decides to act in order to attain an end, his goal, or end, can be finally and completely attained only at some point in the future. If the desired ends could all be attained instantaneously in the present, then man’s ends would all be attained and there would be no reason for him to act; and we have seen that action is necessary to the nature of man. Therefore, an actor chooses means from his environment, in accordance with his ideas, to arrive at an expected end, completely attainable only at some point in the future. For any given action, we can distinguish among three periods of time involved: the period before the action, the time absorbed by the action, and the period after the action has been completed. All action aims at rendering conditions at some time in the future more satisfactory for the actor than they would have been without the intervention of the action.
A man’s time is always scarce. He is not immortal; his time on earth is limited. Each day of his life has only 24 hours in which he can attain his ends. Furthermore, all actions must take place through time. Therefore time is a means that man must use to arrive at his ends. It is a means that is omnipresent in all human action.
Action takes place by choosing which ends shall be satisfied by the employment of means. Time is scarce for man only because whichever ends he chooses to satisfy, there are others that must remain unsatisfied. When we must use a means so that some ends remain unsatisfied, the necessity for a choice among ends arises.
JPMorgan’s Blunder Is No Market Failure →
The free market has been called a profit and loss system. In the real world all investments involve imperfect knowledge. No one knows with certainty in advance how much risk is too much in a given investment, and no one knows with certainty when one is throwing good money after bad. After all, sometimes losses are indeed temporary, and sticking with it until things turn around may be the prudent thing to do.
Before the fact, estimated profits and losses help us (imperfectly) to tell good choices from bad. After the fact, actual profits and losses tell us whether we were right.
When JPMorgan has done well in the past, and evidently until this recent episode it had been doing well relative to other banks, it made profits. But in this last instance it appears that it chose poorly and that it and its investors are suffering the consequences. The fallout for some of JPMorgan’s executives seems to have begun. And as reported, the firm has already lost a $15 billion chunk of its market value. Again, that’s what’s supposed to happen.
The financial industry in the United States is far from a free market. Contrary to the impression you might get from the popular press, it’s not a playground for freewheeling capitalist buckaroos. But to the extent that free-market principles apply, neither losses from error nor profits from good decisions are in themselves grounds for “tighter regulation.” Rather, those are precisely the means by which people who trade in the free market regulate one another.
In a free market, failure is always an option.
The word “inflation” originally applied solely to the quantity of money. It meant that the volume of money was inflated, blown up, overextended. It is not mere pedantry to insist that the word should be used only in its original meaning. To use it to mean “a rise in prices” is to deflect attention away from the real cause of inflation and the real cure for it.
—
Henry Hazlitt, What You Should Know About Inflation (1960)
I’ve made this argument many times (see here, here, here, and here), but am only now reading Hazlitt’s WYSKAI. Definitely a worthy read.
Money and Speech
Statists, particularly on the left, often use the phrase: “Money is not speech.”
Usually, it’s employed in political discourse as a pitch to keep opposing political ideas from “overwhelming” the population with opinions the would-be censors find abhorrent. It’s a phrase that’s been in greater use (along with its rhetorical corollary “corporations are not people”*) since the Citizens United decision in 2010.
But the phrase reveals a fundamental misunderstanding of both money and speech.
First, when discussing speech, as in “Freedom of Speech,” it must be understood as not merely referring to audible vocalizations of words. What is meant is “Freedom of Expression,” and people may express themselves not only through speaking, but also with the written word, art, film, dance, fashion, music, silent protest, etc.
And, sure, it can be said that money qua money is not necessarily itself speech. It is, however, a facilitator of speech.
For example, Jackson can stand at location X and speak out loud to all passersby. He would be free to express himself however he wishes. He can also yell or cup his hands around his mouth in order for his speech to reach more ears. After all, he feels that what he is sharing is important and would like the largest audience possible.
Now, what if there was a device that Jackson could hold to his lips to amplify his speech and have it reach a larger audience still?
It just so happens that such a device exists: a megaphone. So how could he acquire this device? He could try to gather the raw materials to first make the tools and producer goods necessary to build the device and, subsequently, build those tools. Then he’d gather the raw materials to make the plastics and wiring of the device itself. Then, after teaching himself how to do so, he would mold the plastic, create and build a battery for power, and finally assemble the megaphone.
But Jackson is a fisherman. He lacks the requisite skills to build such a device, and teaching himself such skills would take time away from what he does well (and keeps his family fed). Luckily, there is a man in town, Ferguson, who specializes in such things. But Ferguson is not Jackson’s slave: Jackson cannot force Ferguson to give up his time, labor, and raw materials in order to build a megaphone for him. However, Jackson, as a fisherman, can offer Ferguson some fish in return for the megaphone. This is called direct exchange, or barter.
Ferguson, though, has no need for fish (the improbability of finding a trading partner who is desiring exactly what someone is willing to trade in direct exchange is called a “double coincidence of wants”). Yet he does want butter and salt, and is willing to take three pounds of each in return for his megaphone. So Jackson, before he can acquire the megaphone, must first acquire butter and salt and thus engage in indirect exchange to meet his goals. He heads into town and immediately finds many people willing to trade salt for fish, so he makes the trade that is most in his favor (with whoever is willing to accept the least amount of fish for his desired amount of salt). He also finds two different people willing to part with their excess butter, but neither want fish. One dairy farmer wants two pounds of bacon for his three pounds of butter, and the other dairy farmer is willing to part with three pounds of butter in exchange for 12 fresh eggs. So off Jackson goes in search of eggs and bacon, and to find out which one (12 eggs or two pounds of bacon) would require him to give up the fewest fish. When he eventually completes all his trades, he can then finally trade for the megaphone.
And if Jackson wished to disseminate his speech through flyers, he’d have the same options: he can either build an axe, chop some trees, create wood pulp, make paper, make pencils (an impossible process to do by himself), write on every flyer, etc. - or he can trade with the man at the paper mill and the woman with the printing press through the same series of complex exchanges outlined above.
As you can plainly see, despite being superior to direct exchange and its inherent limitations, this entire process of indirect exchange can be clumsy and complicated and uses up much time (the scarcest of resources) in finding the right trading partners and the best ratios (or prices). This is where money comes in.
In the example above, Jackson was able to trade for salt very quickly. This is because salt is more easily tradable, has higher marketability. Unlike chandeliers and wagon wheels, salt can be more easily transported and has more universal demand. Unlike cows and megaphones, it’s much easier to use in varying denominations and to make change. Unlike eggs and fish, it doesn’t have a limited shelf life before it spoils. For these and other reasons, people were much more likely to trade for salt, even if they didn’t need it. For them, salt wasn’t a consumer good (a good meant for direct use or consumption) or a producer good (a good intended to use as a tool or material to create a consumer good), it was a store of value and a relatively stable commodity that served to facilitate exchange. It was desired, not for its direct utility but in its capacity to be traded in the future due to its superior marketability, divisibility, stability, etc. So if salt, in Jackson’s economy of indirect exchange, becomes widely accepted as a medium of exchange, it then, in turn, becomes money.
Murray Rothbard explained what makes money:
“[J]ust as in nature there is a great variety of skills and resources, so there is a variety in the marketability of goods. Some goods are more widely demanded than others, some are more divisible into smaller units without loss of value, some more durable over long periods of time, some more transportable over large distances. All of these advantages make for greater marketability. It is clear that in every society, the most marketable goods will be gradually selected as the media for exchange. As they are more and more selected as media, the demand for them increases because of this use, and so they become even more marketable. The result is a reinforcing spiral: more marketability causes wider use as a medium which causes more marketability, etc. Eventually, one or two commodities are used as general media—in almost all exchanges—and these are called money.
Historically, many different goods have been used as media: tobacco in colonial Virginia, sugar in the West Indies, salt in Abyssinia, cattle in ancient Greece, nails in Scotland, copper in ancient Egypt, and grain, beads, tea, cowrie shells, and fishhooks. Through the centuries, two commodities, gold and silver, have emerged as money in the free competition of the market, and have displaced the other commodities. Both are uniquely marketable, are in great demand as ornaments, and excel in the other necessary qualities. In recent times, silver, being relatively more abundant than gold, has been found more useful for smaller exchanges, while gold is more useful for larger transactions. At any rate, the important thing is that whatever the reason, the free market has found gold and silver to be the most efficient moneys.
The establishment of a money on the market enormously increases the scope for specialization and division of labor, immensely widens the market for every product, and makes possible a society on a civilized productive level. Not only are the problems of coincidence of wants and indivisibility of goods eliminated, but individuals can now construct an ever-expanding edifice of remote stages of production to arrive at desired goods. Intricate and remote stages of production are now possible, and specialization can extend to every part of a production process as well as to the type of good produced. Thus, an automobile producer can sell an automobile in exchange for the money, e.g., butter or gold, and then exchange the gold partly for labor, partly for steel, partly for chrome, partly for rubber tires, etc. The steel producers can exchange the gold partly for labor, partly for iron, partly for machines, etc. Then the various laborers, landowners, etc., who receive the gold in the production process can use it as a medium to purchase eggs, automobiles, or clothing, as they desire.
The whole pattern of a modern society is thus built on the use of money…”
So when someone claims that “money is not speech,” what they are arguing for is limitations to be placed on using money to advance and promulgate speech or expression (usually with regards to their political adversaries). And, by doing so, they are ultimately arguing for limitations on speech itself. The solution to “bad” speech is more speech. Stifling speech by demonizing money only serves those who can afford to jump through the loopholes and, counter to expectations, buy themselves favors and exceptions from the would-be censors.
Money enables human cooperation and advancement; it allows for specialization and promotion above a primitive existence. To assign this tool of human progress nefarious characteristics simply demonstrates historical and economic ignorance.
Robert Wenzel's Epic Speech at The NY Fed →
Wenzel pulled no punches. The entire thing is worth reading, but here’s a sampling:
I suspect my views are so different from those of you here today that my comments will be a complete failure in convincing you to do what I believe should be done, which is to close down the entire Federal Reserve System
My views, I suspect, differ from beginning to end. From the proper methodology to be used in the science of economics, to the manner in which the macro-economy functions, to the role of the Federal Reserve, and to the accomplishments of the Federal Reserve, I stand here confused as to how you see the world so differently than I do.
I simply do not understand most of the thinking that goes on here at the Fed and I do not understand how this thinking can go on when in my view it smacks up against reality. …
In the science of physics, we know that water freezes at 32 degrees. We can predict with immense accuracy exactly how far a rocket ship will travel filled with 500 gallons of fuel. There is preciseness because there are constants, which do not change and upon which equations can be constructed.
There are no such constants in the field of economics since the science of economics deals with human action, which can change at any time. If potato prices remain the same for 10 weeks, it does not mean they will be the same the following day. I defy anyone in this room to provide me with a constant in the field of economics that has the same unchanging constancy that exists in the fields of physics or chemistry.
And yet, in paper after paper here at the Federal Reserve, I see equations built as though constants do exist.
And he ends the speech like a boss:
The noose is tightening on your organization, vast amounts of money printing are now required to keep your manipulated economy afloat. It will ultimately result in huge price inflation, or, if you stop printing, another massive economic crash will occur. There is no other way out.
Again, thank you for inviting me. You have prepared food, so I will not be rude, I will stay and eat.
Let’s have one good meal here. Let’s make it a feast. Then I ask you, I plead with you, I beg you all, walk out of here with me, never to come back. It’s the moral and ethical thing to do. Nothing good goes on in this place. Let’s lock the doors and leave the building to the spiders, moths and four-legged rats.
[On Inflation]
Under Austrian orthodoxy, the money supply works in extraordinarily predictable ways: namely, if you increase it, inflation follows. Austrians have always defined inflation solely as an increase in the money supply.
A quick point: yes indeed “Austrians have always defined inflation solely as an increase in the money supply.” But then again, so did everyone else. I’ve discussed this before:
Even Keynes himself defined [inflation] this way. In fact, from 1864-2003, that’s exactly how Webster’s defined inflation: “undue expansion or increase, from over-issue; — said of currency.”
That this definition is less common today is a direct consequence of what can only be considered many years’ worth of Orwellian language restructuring [by the neo-Keynesians and monetarists*]. As I previously explained, “Inflation was and is definitionally printing money, or more specifically inflating the money supply. By divorcing the word from its literal origins, [central planning apologists] cloud the direct effect between money printing and the value of money.”
This is not unlike suddenly using the word dog to instead refer to dog piss.
*in case my point wasn’t already clear, this refers to most modern-day Keynesians and monetarists
(Source: logicallypositive)
Ron Paul vs. Paul Krugman: Austrian vs. Keynesian economics in the financial crisis
(Source: youtube.com)
How the Fed Favors The 1% →
The relentless expansion of credit by the Fed creates artificial disparities based on political privilege and economic power. …
The Fed doesn’t expand the money supply by uniformly dropping cash from helicopters over the hapless masses. Rather, it directs capital transfers to the largest banks (whether by overpaying them for their financial assets or by lending to them on the cheap), minimizes their borrowing costs, and lowers their reserve requirements. All of these actions result in immediate handouts to the financial elite first, with the hope that they will subsequently unleash this fresh capital onto the unsuspecting markets, raising demand and prices wherever they do.
The Fed, having gone on an unprecedented credit expansion spree, has benefited the recipients who were first in line at the trough: banks (imagine borrowing for free and then buying up assets that you know the Fed is aggressively buying with you) and those favored entities and individuals deemed most creditworthy. Flush with capital, these recipients have proceeded to bid up the prices of assets and resources, while everyone else has watched their purchasing power decline.
At some point, of course, the honey flow stops—but not before much malinvestment. Such malinvestment is precisely what we saw in the historic 1990s equity and subsequent real-estate bubbles (and what we’re likely seeing again today in overheated credit and equity markets), culminating in painful liquidation.
The Fed is transferring immense wealth from the middle class to the most affluent, from the least privileged to the most privileged. This coercive redistribution has been a far more egregious source of disparity than the president’s presumption of tax unfairness (if there is anything unfair about approximately half of a population paying zero income taxes) or deregulation.
Pitting economic classes against each other is a divisive tactic that benefits no one. Yet if there is any upside, it is perhaps a closer examination of the true causes of the problem. Before we start down the path of arguing about the merits of redistributing wealth to benefit the many, why not first stop redistributing it to the most privileged?
The first truth to be discovered about human action is that it can be undertaken only by individual “actors.” Only individuals have ends and can act to attain them. There are no such things as ends of or actions by “groups,” “collectives,” or “States,” which do not take place as actions by various specific individuals. “Societies” or “groups” have no independent existence aside from the actions of their individual members. Thus, to say that “governments” act is merely a metaphor; actually, certain individuals are in a certain relationship with other individuals and act in a way that they and the other individuals recognize as “governmental.” The metaphor must not be taken to mean that the collective institution itself has any reality apart from the acts of various individuals. Similarly, an individual may contract to act as an agent in representing another individual or on behalf of his family. Still, only individuals can desire and act. The existence of an institution such as government becomes meaningful only through influencing the actions of those individuals who are and those who are not considered as members.
— Murray Rothbard (Man, Economy, & State)
More on Wage Labor and Mutualism
Following up on a post I responded to this weekend, fellow blogger logicallypositive (whom I will be responding to directly and is heretofore referred to as “you”) posted:
that C4SS article I reblogged yesterday talking about the conditionally exploitative nature of wage labor basically made the point i’ve been tryign to make all along. wage labor is not exploitative as long as you can employ yourself. but it’s your good friend the government that makes that impossible with fun things like zoning laws, liscensing requirements, permits, etc.
I guess it leads me back to my central point: all exploitation can be traced back to the cartelization of brute, physical force. Exploitative economic relationships are only maintained because if you try to break free from them, then suddenly you find yourself locked up in a jail cell. Absent coercive forces, capitalism loses its intimidating fangs so many people are scared of. If they can’t beat you or imprison you for not playing by their rules, then it’s really rather harmless. It’s not an inherent trait of capitalism, it’s a result of a bureaucratic monopoly gone wild thanks in part to the influence of capital.
In responding, it is my hope to clarify a perceived misunderstanding.
First, your premise: “wage labor is not exploitative as long as you can employ yourself.”
I absolutely agree. If one is prevented from self-employment, chiefly by the state, then wage employment becomes eo ipso ”exploitative” as the employers are themselves necessarily agents and proxies of the state (either directly or by crony corporatist grace) since no one can self-employ in order to eventually become an employer. Even if self-employment is not completely obstructed, the more impediments to self-employment and entrepreneurship, the more exploitative wage employment becomes.
So here is where your word “can” is key. Can one employ oneself? The more easily one can - without the state interfering - the less the likelihood for relative exploitation, as it were. In other words: the more the state impedes in the ability to employ oneself in order to drive laborers to certain employers, and in turn the more individuals are thus employed by such employers, the more control comes under direction of the state since those employers are themselves wards of the state. The artificial elimination of choice shifts the scales of fairness away from the individual and in favor of the state and its agents and proxies.
And it is abundantly obvious that the labyrinthine legal and regulatory code is weaved with the thread of the larger special interests and connected cronies, thus weighing more heavily on the smaller competition. And there’s no smaller business than a self-employed entrepreneur.
As Rothbard argued: “our corporate state uses the coercive taxing power either to accumulate corporate capital or to lower corporate costs.”
In fact, I agree with the crux of an argument - though decidedly not all his points in making his argument - Kevin Carson (the mutualist author of the piece you posted) presented a few years ago:
[T]he state, by artificially reducing the costs of large size and restraining the competitive ill effects of calculation problems, promotes larger size than would be the case in a free market—and with it calculation problems to a pathological extent. The state promotes inefficiencies of large size and hierarchy past the point at which they cease to be worth it, from a standpoint of net social efficiency, because those receiving the benefits of large size are not the same parties who pay the costs of inefficiency.
Further, Austrians view entrepreneurs - an historically ambiguous term, but chiefly as promoter-entrepreneurs (the driving, “quick-eyed,” visionaries) and capitalist-entrepreneurs (the entrepreneurs who risk their own capital in their endeavors for profit) - as ultimate Homo agens.
Said Mises:
The driving force of the market, the element tending toward unceasing innovation and improvement, is provided by the restlessness of the promoter (entrepreneur) and his eagerness to make profits as large as possible.
More Mises, later in Human Action:
The driving force of the market process is provided neither by the consumers nor by the owners of the means of production—land, capital goods, and labor—but by the promoting and speculating entrepreneurs. These are people intent upon profiting by taking advantage of differences in prices. Quicker of apprehension and farther-sighted than other men, they look around for sources of profit. They buy where and when they deem prices too low, and they sell where and when they deem prices too high. They approach the owners of the factors of production, and their competition sends the prices of these factors up to the limit corresponding to their anticipation of the future prices of the products. They approach the consumers, and their competition forces prices of consumers’ goods down to the point at which the whole supply can be sold. Profit-seeking speculation is the driving force of the market as it is the driving force of production.
Murphy condenses the Austrian respect for the self-employed entrepreneur as such:
Following Mises, modern Austrian economists stress the primacy of the entrepreneur. At bottom, the entrepreneur simply buys low and sells high. But in order to do this, the entrepreneur must see an opportunity in the market pricing structure that others have overlooked.
By pursuing personal profits, the entrepreneur ends up rearranging goods in a way more pleasing to consumers. [There is] harmony between personal profit and service to others in the voluntary market economy.
Lachmann explains the crucial role played by the self-employed entrepreneur:
We are living in a world of unexpected change; hence capital combinations … will be ever changing, will be dissolved and reformed. In this activity, we find the real function of the entrepreneur.
Rothbard elaborates:
Every entrepreneur, therefore, invests in a process because he expects to make a profit, i.e., because he believes that the market has underpriced and undercapitalized the factors in relation to their future rents. If his belief is justified, he makes a profit. If his belief is unjustified, and the market, for example, has really overpriced the factors, he will suffer losses.
The profits and losses, in turn, inform the market (the various other economic actors) on what is viable. (Related: The Calculation Problem and Price Theory.)
But the mutualist position, which, again, is what Carson subscribes to, doesn’t end with simply advocating for the option of self-employment to not be obstructed. Mutualism sees all hierarchy, even truly voluntary (or euvoluntary), as problematic.
Confusion, however, is understandable considering Carson presented his argument as such:
As libertarians, we don’t want to abridge the freedom to contract wage employment any more than [the typical libertarian] does.. But we see subordination and hierarchy as undesirable. And we want to reduce, as much as possible, material constraints that promote entry into such authoritarian relationships.
His first sentiment flatly asserts that he adheres to the “libertarian” ideal of not wishing to interfere with “the freedom to contract wage employment.” All well and good… until we reach his “but.” It is in that contrasting conjunction where we find truth. The second sentiment belies his first, and through the use of “but” we learn that it is the second sentiment that counts. Wage employment is definitionally hierarchical. Carson goes one further and refers to wage employment as authoritarian (and he earlier describes a wage-paying workplace as an “authoritarian workplace”).
Ultimately, that is the mutualist position: (1) all hierarchy is illegitimate, exploitative, and intolerable, (2) eliminating the state would eventually lead society to eliminating hierarchy. Wage employment, thus, is illegitimate, exploitative, intolerable, and only prevalent because of the state. Indeed, the title of the post calls for the outright abolition of the wage system - a pillar of mutualism per Pierre-Joseph Proudhon himself.
As an Austrian anarcho-capitalist, I see it differently.
Not everyone is a visionary. Not everyone has the capacity to develop techniques in improving production methods. Not everyone has the capital to supply the start-up costs. Not everyone has the capacity or willingness to take risks. And even among those who do, not everyone will be successful. And among those who are successful, expanding business to meet consumer demands (and thus creating further wealth) would mean to expand production - and to do so requires different roles at different levels of productivity (i.e. labor), which establishes a natural hierarchy. And even those who are successful, they may not always be successful.
So for these individuals, wage labor offers the opportunity for employment without risking initial capital, offering insight on production methods, or being inclined to creativity and inventiveness in postulating future demands.
Here’s Mises again:
In the context of economic theory the meaning of the terms concerned is this: Entrepreneur means acting man in regard to the changes occurring in the data of the market. Capitalist and landowner mean acting man in regard to the changes in value and price which, even with all the market data remaining equal, are brought about by the mere passing of time as a consequence of the different valuation of present goods and of future goods. Worker means man in regard to the employment of the factor of production human labor. Thus every function is nicely integrated: the entrepreneur earns profit or suffers loss; the owners of means of production (capital goods or land) earn originary interest; the workers earn wages.
Rothbard explains that the wise entrepreneur is thus rewarded:
[The entrepreneurial] loser… receives his penalty in the form of losses. These losses drive him from his poor role in production. If he is a consistent loser wherever he enters the production process, he is driven out of the entrepreneurial role altogether. He returns to the job of wage earner. In fact, the market tends to reward its efficient entrepreneurs and penalize its inefficient ones proportionately. In this way, consistently provident entrepreneurs see their capital and resources growing, while consistently imprudent ones find their resources dwindling. The former play a larger and larger role in the production process; the latter are forced to abandon entrepreneurship altogether.
There is no inevitably self-reinforcing tendency about this process, however. If a formerly good entrepreneur should suddenly made a bad mistake, he will suffer losses proportionately; if a formerly poor entrepreneur makes a good forecast, he will make proportionate gains. The market is no respecter of past laurels, however large. Moreover, the size of a man’s investment is no guarantee whatever of a large profit or against grievous losses. Capital does not “beget” profit. Only wise entrepreneurial decisions do that. A man investing in an unsound venture can lose 10,000 ounces of gold as surely as a man engaging in a sound venture can profit on an investment of 50 ounces.
[It is a flawed] view that working for wages is somehow nonmarket or antilibertarian, and would disappear in a free society. … [H]ow [anyone] can say that a voluntary sale of one’s labor for money is somehow illegitimate or unlibertarian passeth understanding. Furthermore, it is simply absurd for him to think that, in the free market of the future, wage labor will disappear. Independent contracting, as lovable as some might see it, is simply grossly uneconomic for manufacturing activity. The transaction costs would be far too high. It is absurd, for example, to think of automobile manufacturing conducted by self-employed, independent contractors. …
[T]he emergence of wage labor was an enormous boon for many thousands of poor workers and saved them from starvation. If there is no wage labor — as there was not in most production before the Industrial Revolution — then each worker must have enough money to purchase his own capital and tools. One of the great things about the emergence of the factory system and wage labor is that poor workers did not have to purchase their own capital equipment; this could be left to the capitalists.
Contrast the above with Proudhon:
Mutuality, reciprocity exists when all the workers in an industry, instead of working for an entrepreneur who pays them and keeps their products, work for one another and thus collaborate in the making of a common product whose profits they share amongst themselves.
So your interpretation of Carson’s position - that wage labor is “conditionally exploitative” - is incorrect. To mutualists, wage labor is inherently exploitative because of its hierarchical (authoritarian, per Carson) nature.
This is what Carson implied when he mentioned “the culture of subordination in the workplace,” and “the economic power structures on which it depends.”
This belief ultimately stems from the mutualist shunning of anarcho-capitalist/libertarian understanding of private property in favor of a Marx-Proudhon distinction of personal property through the mutualist adherence to the labor theory of value and its corollary that the laborer must be the owner of the means of production. The employer/owner/capitalist, thus, is robbing the laborer of his full value.
Property is key to the argument here:
Improved productivity depends on capital goods, which in turn depend on delayed consumption. People who choose to delay consumption extensively can come to own a stock of capital goods beyond what they can physically use themselves. If such people cannot hire labor to work with those goods without thereby losing title, they will consume their capital and stop saving. …
A capitalist/worker arrangement is effectively an intertemporal exchange. Workers are advanced present money in exchange for enabling the capitalist to own and sell a future product. Abolishing wages would therefore be injurious to both would-be consenting parties in the exact same way that abolishing interest, another phenomenon of intertemporal exchange, would be. …
By rigidly yoking ownership with physical manipulation, anarcho-syndicalists [and mutualists] would severely constrain the public’s horizons by making it so those who provide for them can only do so in a severely limited variety of ways. Under [this] legal order, not only would shareholder/capitalists have to be workers and vice versa; they would have to be shareholder/capitalists in the same industry in which they are workers and vice versa.
Again, that would preclude innumerable mutually advantageous intertemporal exchanges, and plunge savings, capital accumulation, and future productivity to levels that are fathoms below what the public as consumers (users of final goods) would have preferred. The result would be starvation for most, and a return to a primitive, hand-to-mouth existence for the rest.
And Austrians (indeed - most libertarians, voluntaryists, and anarcho-capitalists), of course, also adhere to the idea that value is subjective.
Per Menger:
Value is a judgment economizing men make about the importance of the goods at their disposal for the maintenance of their lives and well-being. Hence value does not exist outside the consciousness of men.
If you wish to dip your toe in mutualist waters, simply be aware of what lies beneath.
It was John Maynard Keynes, a man of great intellect but limited knowledge of economic theory, who ultimately succeeded in rehabilitating a view long the preserve of cranks with whom he openly sympathised. He had attempted by a succession of new theories to justify the same, superficially persuasive, intuitive belief that had been held by many practical men before, but that will not withstand rigorous analysis of the price mechanism: just as there cannot be a uniform price for all kinds of labour, an equality of demand and supply of labour in general cannot be secured by managing aggregate demand.
— F.A. Hayek
Inflation, instability, cronyism: hallmarks of central banking
laliberty: Hi. I hope you don’t take my response as an attack. If you want more information, I’d be happy to point you to some sources. I promise to not hold your being a Fighting Irish against you… (couldn’t help it, I’m a ‘Cane and remember the Catholics vs Convicts rivalry too well) :)
Absolutely not — I am all for reasoned debate and am more than happy to engage you on this.
I do disagree with you on a number of places, though, starting with the idea that the poll is a Keynesian one — the point of the IGM forum is to survey economists from schools as disparate as UChicago and Princeton (one neoclassical and one Keynesian). Furthermore, Monetarists and Keynesians rarely get along (see: Stephen Williamson and Paul Krugman).
My point was that they are all central banking apologists, all essentially monetarists of some sort - meaning all accept or advocate a governmental role in the supply of money. Being neo-classical, or Keynesian, or Chicago-Schooler, or Supply-sider, or even Socialist - like a Monetarist - is not mutually exclusive to being in favor of a centralized authority in monetary policy. That there are disagreements doesn’t negate this. Republicans and Democrats disagree vehemently on many things, but they are both, generally speaking, statists.
Basically, the question asked is a fairly defining one.
I’m an economics student myself, and I happen to take issue with some of your contentions. First, and this is a technical quibble, inflation isn’t an increase in the money supply, but rather an increase in price levels.
This is not, in fact, merely a quibble. This is actually a crucial point. I offered a link in my previous post that explained how inflation was always defined as an inflating of the currency or inflating of the money supply. Even Keynes himself defined the term this way. In fact, from 1864-2003, that’s exactly how Webster’s defined inflation: “undue expansion or increase, from over-issue; — said of currency.”
That this definition is less common today is a direct consequence of what can only be considered many years’ worth of Orwellian language restructuring. As I previously explained, “Inflation was and is definitionally printing money, or more specifically inflating the money supply. By divorcing the word from its literal origins, [central planning apologists] cloud the direct effect between money printing and the value of money.”
This is not unlike suddenly using the word dog to instead refer to dog piss.
Ask your economic professors why inflation had a set definition that has only recently changed. Why what once was inflation is now defined by its effects. I took a number of Keynesian courses in college and it was in challenging what seemed to be inconsistencies did I truly learn.
More to the point, your argument implicitly rests on the idea that the “falling value of the dollar,” as you term it, is intrinsically bad.
That is not necessarily what my argument rests on. I was countering the claim that monetary policy allows for more stability and less volatility than the value of gold. In fact, “stable prices” is one of the Fed’s primary purposes. I think I demonstrated the falsity of such a claim in my last post by showing how in 30+ years, “relative to the Federal Reserve’s “stable” dollar, the price of gasoline increased by 245%. Relative to “volatile” gold, on the other hand, the price of gasoline decreased by 0.5%..”
You neglect, of course, to realize that increases in price levels extend to the price of labor — that is, compensation (wages + benefits) increase with the price of goods. (Now, and this is something related to my biggest passion, healthcare policy, increases in compensation have gone almost entirely to insurance premiums — but I digress.)
If price levels eventually extend to wages, this merely means that wages are catching up to other price changes. The price changes that occur first are always in whichever preferred industry gets the new money, and thus benefits those favored cronies who are most connected. They get to circulate the new dollars before saturation and velocity cause prices to increase. In other words, they have more money before that money is less valued. Those lower on the economic ladder typically feel the price changing effects of inflation well before their wages catch up.
There, of course, are a number of other arguments against the gold standard. As a student of economics, it seems clear to me that monetary policy is, in fact, a useful tool for solving macroeconomic problems. My economics department is a neoclassical, free-market one, but it generally doesn’t deny the empirical evidence that monetary policy can and does have a moderating effect on the volatility of GDP.
There is a separate argument to be made for not intervening in the macroeconomy at all, and I’ll be happy to engage that one too. But as far as I see it, the gold standard is still a bad idea, and for far more reasons than the ones I have oh-so-briefly outlined here.
There’s an inherent problem in using GDP to measure the effectiveness of a central banks moderating effects, considering government spending is factored into “growth.” Even so, The Fed states 2% annual inflation as its goal, which means its ideal is a 2% drop in the purchasing power of the currency. And, I’d also counter that empirical evidence shows an overwhelming and consistent lack of success with regards to central banks’ abilities to mitigate recessions, avoid monetary volatility, and attenuate periods of high unemployment - the main reasons publicly offered for the existence of such central banks. And none of this even addresses the fundamental trouble with a monetary printing press: malinvestment.
But ultimately, this comes down to what my argument does rest on: the use of knowledge in society. I recommend my post on The Calculation Problem and Price Theory for the basics.
You may find this article from The Economist interesting, too.
To this, I’d simply say freedom ain’t easy. The question is whether or not a central bank is the most just, effective, moral, and productive answer for a wealthy, thriving economy and populace. Whatever logistical complications may exist to arrive at the ideal solution are, in my opinion, secondary to the long-term benefit. (Also, as a related side note: Democracy is illegitimate.)
And, yes: Go Irish!
Booo!
