Econ 101: Principles of Economics has an easy answer for everything. For example, =>Does raising the minimum wage destroy jobs? The immediate response from Econ 101 is: “Of course. Workers will want to work more and employers will want to employ fewer workers and unemployment will shoot up.” But that is assuming that workers will always be willing to work more when the wage rate increases and work less when the wage rate falls.
What if you are earning the federal minimum wage of $7.25 an hour and can’t pay the rent, put food on the table and buy clothes for the kids working an eight hour day? To make ends meet you go to work early in the morning to stock shelves at Walmart, then it’s off to your regular job at McDonald’s during the day, and, of course, there is that evening job loading trucks at the depot. Okay, that’s only 16 hours a day, so you can grab a bit to eat here and there in the course of all that and still get in your eight hours of sleep. . . . . . But wait. Now they just raised the federal minimum wage to $10 an hour (in your dreams, but not yet in reality). Fantastic. Now you can drop that evening job loading the trucks at the depot and spend some time with the kids!!! . . . . . Of course, you violated economic theory by not working more when the hourly wage rate rose, but, hey, we can’t all conform to the dictates of Econ 101 all of the time. At first, this might seem like an exception to a more general rule, but let’s look more closely at the dictates of Econ 101.
Econ 101: Principles of Economics also assumes that workers are paid the value of their marginal products, because individual jobs have to compete with one another just as individual workers compete with one another. As long as each worker competes individually and each job competes individually, the best possible equilibrium wage rate is achieved. Labor resources are allocated efficiently with zero unemployment and no jobs left unfilled.
Econ 101 ignores the fact that employers typically control blocks of jobs in what economists call an oligopsony. Comparing economic theory with reality would violate the wonderful, simple world we have created in our minds and would make economics even harder to understand. Why ruin Econ 101 by comparing it with reality. After all, Econ 101 is such a beautiful, simple world, and with our limited mental energy, we just can’t deal with the real world so let’s ignore all those Giffen goods that violate the simplest version of economic theory and the job blocks that enable employers to exert oligopsonistic power.
But if company job blocks are bad, wouldn’t blocks of workers also be bad? In the face of company job blocks, blocks of workers (called unions) move the wage rate back towards a free market equilibrium in what John Kenneth Galbraith called countervailing power in his 1952 book: American Capitalism: The Concept of Countervailing Power. Unions force market outcomes to move closer to the efficient free market equilibrium in what economists call “The Theory of the Second Best.”
In Econ 101 we are taught to believe that government should not interfere with the free market and that taxes produce a deadweight loss (assuming that all that tax money was just thrown into a pile and burned and not used to repair the street in front of your house or pay for the education of your children). To better understand the importance of tax dollars going to public investments that only the government can make read Mariana Mazzucato’s books: The Value of Everything and Mission Economy.
Under Adam Smith’s “invisible hand” as portrayed in his book The Nature and Causes of the Wealth of Nations, businesses compete with one another to drive up product quality and drive down prices until their profits fall to a level just at the point where the business would close if profits fell any further. In this world of free markets, we can ignore business inefficiency, because market competition is so intense that inefficient firms will end in what Joseph Schumpeter called “creative destruction.” In the wonderful world of free markets, firms have no power to set wages, because wages are instead set by market forces outside the power of any business or group of businesses.
In reality, barriers to entry exist where many industries are dominated by a few firms. First mover advantage, network effects, natural monopolies, patent laws and economies of scale often protect established firms and keep out those annoying upstarts. Whenever new firms try to establish themselves, they frequently get bought out by one of the big established firms or get wiped out in a market downturn in what might be more accurately called “competition destruction.”
The dominance of just a handful of firms in each of the major industries in the United States has established low wages and excessively high profits that has diverted money from workers in what might be called Adam Smith’s second invisible hand, which he referred to when he said: “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the publick, or in some contrivance to raise prices.” And he may as well have added: “and to suppress wages.” For a better understanding of the high degree of concentration in major American industries, read Jonathan Tepper’s book (with Denise Hearn): The Myth of American Capitalism.
Since the mid-1970s automation has driven up the marginal products of workers, but their wages have been essentially flat in real terms, because their marginal products have been transferred to the owners. For example, in coal mining a worker driving a giant earth mover can move a lot more dirt than a worker using a shovel, but the monetary gains from improved productivity are mostly diverted to the coal mine owners. To deflect attention from this transfer of wealth, politicians point to globalization and emphasize the “loss” of jobs to foreign competitors, even though automation would have taken away those particular jobs anyway. It is so much easier to just blame “those foreigners.”
Hard work pays off, but not for the employee doing the hard work. The employee’s hard work pays off for the shareholder under the maximization of shareholder value mantra. For a clearer understanding of this issue read law professor Lynn Stout’s book: The Shareholder Value Myth.
What this all boils down to is that the minimum wage, rather than forcing up a competitively determined free market equilibrium wage, is actually moving the wage closer to what would be the equilibrium wage if there really was a free market in the real world. A true, honest, free market economist should welcome minimum wages that move the market wage closer to what would be and should be the equilibrium wage in a truly free market. But, hey, we all have a limited amount of mental energy and who wants to strain their brain dealing with the real world, when we can just worship the simple, wonderful world of the free market as presented to us in Econ 101.
In the last several years, passive stock holders in funds that follow the S&P 500 have earned an average of 20 percent return each year. Did your pay rise that much? Research has found that most Americans cannot come up with $400 in an emergency (especially the two-thirds of Americans who do not have a college degree). If you have saved up and now have $1,000 that is great. If you manage to save $1,000 a thousand times, you will have a million dollars. If you manage to save one million dollars a thousand times, you will have one billion dollars.
Do you really believe that Elon Musk is so many times smarter, more creative and more hard working than anyone else? The rules of the game have been set to benefit the wealthy, and especially the wealthiest of the wealthy. But we are told in Econ 101 that this is the efficient free market outcome. If you want to know why our economy has become so extremely distorted, it is because of so many people have fallen in love with Econ 101: Principles of Economics and don’t realize that he/she is cheating on them.
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