Business Realities or What I Have Learned From the Internet.

[coloradoatheist]

Yep. So I don't think we can really make a comparison with a group living X years ago compared with with today

SimpleDon's observation #42:

•A basic tenet of current neoclassical economics in the US is that if history or empirical data conflicts with their theory then there is something wrong with the data or the interpretation of the history.

There has been a longstanding argument about how and if CPI is off and by how much. But then people turn around and say that CPI is an actually scientific number that can be turned around to make a comparison.

 

[Canard DuJour]

Just a time out to get back to the subject of the thread, things that I have learned on the internet, things that I have been told, unavoidable conclusions from what I have been told and my observations from all of that. I leave it to you to sort out which is which.

• We need poverty and the "dying wage" to provide the proper incentives for the poor to work harder.
• We must not tax the rich and must try to direct ever larger amounts of money to them to provide the rich with the proper incentives to work harder.
• We mustn't just give money to the poor, it reduces their incentive to work.
• We allow the rich to leave all of their money to their children or it will reduce their incentive to work.
• Prices are always set by supply and demand except when they aren't.
• Supply and demand setting prices is suspended when we have to make the point that increased wages increase prices.
• Profits are fixed, increased wages can't reduce them, and therefore prices must go up.
• Profits aren't a cost, but the price of the goods must include the profit.
• Increased profits don't add to the cost, therefore increasing them can't increase prices and unemployment.
• If you believe that profits are too high and must be reduced it is the same as assuming that there is an infinite pool of profits is available.
• Prices and values are set objectively, we just don't know how.
• An increase in the minimum wage always results in an increase in prices and unemployment.
• Other wage increases don't.
• The Marshall Islands study of an increase in the minimum wage is the only example that shows that it causes an increase in unemployment, but it is the only one we need to prove the point.
• Inflation devalues our money except when it drops in value against other countries' currency. This devaluation of our money is deflation.
• "I don't understand what 'deflation' is so I will call almost any economic situation I don't understand 'deflation.'" [/liberal paraphrasing]
• "I also don't understand what 'stagflation' is so I will call any other any economic situation I don't understand 'stagflation.'" [/liberal paraphrasing]
• Inflation is not an increase in prices that causes an increase in the money supply, it is an increase in the money supply that increases prices, most of the time even before the money supply increases.
• People only study enough economics to prove that their preconceived theories and biases are correct. For most that is precious little.
• Economists who discover a small truth about the economy usually destroy its effectiveness by trying to expand it to explain the whole economy, for example, marginalism.
• Any time someone anyone uses the term "Econ 101" they are about to tell you what they wished that economics says about something.
• The term "if starting from an economy at equilibrium" really means "there is no way in hell that this could ever happen."
• Economists in the US study the full range of economic thought from "M" to "N."
• It is easy to explain the concept of "the velocity of money," it means that the economists who came up with it don't understand money.
• The US trade deficit was $800 billion in 2007, the rest of the world had a trade surplus of, wait for it, $800 billion. Apparently we are not to talk about this any more,
• Government spending can't stimulate the economy.
• Lower government spending costs us jobs.
• The human brain is essentially unchanged in a hundred thousand years or so, all of our advances have been achieved because we have learned to come together as a collective; a family, a tribe, a clan, a nation.
• The way forward from here is as autonomous individuals, doing for ourselves, rejecting the collective.
• When people come together and collectively form a government with the best intentions to do good it can't help but result in evil and oppression.
• When people come together and collectively form a corporation with the intention of maximizing profits it can't help but to result in all that is fine and good in the world.
• The way that we all know that governments are evil and oppressive and inefficient is because we all have had to wait in line at the DMV only to find out that that we filled out the wrong form. And Hitler!
• If only government was run like a business with businesses' consumer first orientation, like the cable company.
• Fifty percent of all new businesses fail in the first three years, so it might take awhile and a few tries before we can run government like a business.
• The free market is the natural form of capitalism, but it has never occurred naturally.
• The free market will be able to regulate itself with little or no government interference, but since no one can conclusively explain how it will do this we will just have to wait until it happens to see how it works, but it will be wonderful to see when it finally happens.
• I always had a hard time understanding if a free market cult member was talking about the economy that he wants us to have or was he talking about the economy that we do have.
• Finally I realized that they don't know that there is a difference.
• The only mechanism that the theory of the free market has for correction is a feedback mechanism, which means that there has to deviation from the norm before the corrective action can compensate.
• Unfortunately there are a lot of people in the position to force deviations who can make a lot of money before the feedback mechanism can correct for them.
• The economy, like other social structures like the family, has no purpose, no reason to exist.
• A basic tenet of current neoclassical economics in the US is that if history or empirical data conflicts with their theory then there is something wrong with the data or the interpretation of the history.
• A basic tenet of current neoclassical economics in the US is that the more assumptions that are made to simplify a theory or a model the closer it is to being an universal truth.
• A developing tenet of current neoclassical economics is that it doesn't matter if economic theories are correct, if everyone believes that the theories are correct then the economy will behave as if the theories are correct.
• Economics in the Anglo American countries is based on ideology, not on the practical assessment of how our current economy really works.
• Basing an economy on ideology and theory hasn't worked out so well in the past, for example, the economies based on Marxism.
• The concept that the free market can exist and that it can self-regulate is not based on faith, it is the conclusion of unimpeachable logic that starts from bedrock, universally accepted truths, starting with the bedrock, universal truth that the self-regulating free market can exist.
• The self-regulating free market is a solution that parallels what we often find in life, that there is always a simple solution to a complex problem if you don't know enough about the problem.
• Only a True Libertarian® can achieve True Libertarian® goals like deregulation of the economy.
• The only True Libertarian® is the one you are talking to, but he has doubts even about himself.
• Every libertarian believes that they are one of the one in ten thousand übermenchen that would excel to save the world if it weren't for oppressive government regulation.
• Of course, 99.99% of them have to be wrong.
• The only failing that the in all other ways vastly superior Libertarian/Randian übermench has is their curious, total inability to understand government regulations, a flaw that leaves them completely paralyzed and unable to perform.
  [*}Lowering wages doesn't increase profits, and increasing wages doesn't lower profits, if you knew the difference between being pro-market and being pro-business you would understand why.
• Government regulations kill jobs, and someday soon we will be shown an example of one that does.
• Apparently it is easy to oppose regulation in the abstract but impossible to do so in the real world.
• Libertarians want to replace government regulation with the streamlined, efficient, always fair, inexpensive process of everybody suing everyone else, because there is nothing better than a judge telling you what you should have done three years or so after the fact.
• And instead of having to understand and keep up with hundreds of regulations you only have to understand and keep up with tens of thousands of court decisions which can and therefore will vary from jurisdiction to jurisdiction.
• The most radical Libertarians, the followers of Murray Rothbard, want to limit the defendants in a civil suit to the direct participants in the exchange transaction, resulting in multiple, cascading suits, for a defect in your car you could only sue the car dealer who, in turn, would sue the manufacturer.
• Capitalism has to be a nearly perfect economic system for there to be a self-regulating free market.
• Capitalism is a terrible economic system, but it is the best one that we been able to come up with so far.
• Capitalism's biggest flaw is that the trait that makes it work so well, that it rewards innovation and risk taking, is also its biggest problem, that it rewards destructive innovation and criminal risk taking even more.
• The most radical politicians in the nation's history, the ones that were the most committed to the radical change of society and of the status quo, the founding fathers and Lincoln's Republicans, were actually conservatives.
• It is unfair to say that modern conservatives are afraid of change.
• If conservatives were afraid of change would they be so willing to rollback sixty years of social and economic progress?
• It isn't change that the modern conservative is afraid of, it is modernity.
• Conservatives don't trust science.
• Liberals don't trust technology, unless it has an apple logo.
• In general people don't trust what they don't understand.
• The obvious conclusion from this is that virtually no one trusts mathematics.
• Neoclassical economics doesn't include money, banking, debt, financial malfeasance or the possibility of economic instability in their theories and models.
• Six years after the The Great Financial Crisis and Recession which started when financial malfeasance by the banks left unchecked by the Bush administration triggered economic instability which was prolonged and made much worse by the massive amount of private debt which produced a huge shortfall of liquidity, and the neoclassical economists still can't figure out how their models and theories failed to predict it or explain how deep it would go or how long it would last.
• Their best guess is that the 40 year old Community Redevelopment Act forced the banks to make bad loans to poor minorities. Or Fannie Mae and Freddie Mac. Or animal spirits. Not Global Warming, no such a thing. Not Hitler, no, not this time. Mystery, total mystery.
• The word "liberal" now means anyone who is a moderate, a liberal, a social democrat, a Keynesian, a radical, socialistic, communistic, a fascist (Hitler!!), in short anyone who is not a conservative in its modern meaning of being a reactionary or a libertarian in its modern meaning of an imaginary reactionary, that is one who wants to return to a past that never existed.
• Modern movement conservatism is a symbolic relationship between the rich and the stupid, the stupid keep the rich rich and the rich keep the stupid stupid.
• Modern movement conservatism in the early 1980's eagerly embraced supply side, or neoliberal, economics, the idea that the fiscal policies of the government set the split of the total income of the nation between wages and profits, between consumption and investment, between the poor, the middle class and the rich, and that these fiscal policies should be changed to favor profits, investment and the rich.
• Once this was done the beneficiaries of supply side economics, the rich, set about to use their money to wipe any memory of fiscal policies being changed from the minds of the movement conservatives (but leave the fun![/Frozen™ reference]) to where today they can be heard repeating the drone that the change in the income distribution over the last thirty five years was either the result of unknown and unknowable economic forces or, alternately, the result of the natural operation of the free market, but not in anyway a result of the nation's fiscal policies.
• Keeping the rich rich and the stupid stupid since 1980.
• We have always had wingnuts in this country, those that declare that the president is trying to be a dictator or a king and who is trying to subvert the Constitution or that black-brown-red-yellow-green-orange-Jewish-Catholic-atheistic-Irish-Italian-Chinese-Mexican-illegals-anarchistic-socialistic-communistic-Islamic-terroristic-homosexual-drug dealing-pornographer-deviant-femNazi (Hitler!!) fanatics-maniacs are close to taking my guns away taking over the country, but except for short time after the implosion of the Whig party and the brief existence of the Know Nothings we have been able as a sane society to ignore them and their rants, to provide them with the obscurity they so deserve. But no more, thanks to money from the rich they now have control of one of the two major parties and effective veto of anything coming out of Congress.
• All in the name of maintaining the rich and the stupid.
• This state of affairs has to at least partially be blamed on the incompetence of the other major party whose not so brilliant idea was to box in the stupid by becoming half stupid themselves, which only pushed the stupid further to the right into previously uncharted levels of stupid.

I tried to break up the list but the system kept putting it back together.

Bravo!

 

[Loren Pechtel]

But the ability of more efficient suppliers being able to add new production capacity to satisfy any unfulfilled demand from the long term loss of the inefficient supplier going bankrupt is in the same time frame, years.

You're assuming there are more efficient suppliers. You have no basis for this assumption.

I am assuming that the survivors are more efficient than the marginal companies that fail. This is wrong because you think that the more efficient companies will fail while the less efficient companies don't?

The point is that you are assuming there is always a more efficient supplier. When things get bad enough even the efficient ones fail.

This is an example of you taking a small change, and figuring the result as if it were an infinite change. This is a flaw in your reasoning.

I'm not figuring an infinite change. Look at what happened in 2008--even efficient suppliers were forced out of business.

Coupled with a rather incomplete knowledge of the economics theories that you believe in and champion it leaves you rather poorly equipped to discuss these matters. If this is the way that all of your opinions are formed I would think that this observation would extend to almost any adult subject.

Your "economics" only make sense if there is an infinite pool of profit to take to fund your ideas.

No, it makes sense as long as the amount of profit is above zero. The idea that for there to be an amount above zero, there must be infinite profit, is the same flaw in your reasoning as above.

The point is that you are making no effort to compare the profit to what you are demanding they spend in most cases. Since there's no need to check the size of the pool it must be infinite.

Among the rabid opponents of any increase in wages you stand out as the most determined. There is no exception to "this will cause unemployment" that you won't dismiss out of hand without any explanation, but with a simple chant, "no exceptions, any increase is economic suicide."

I'm not saying it's economic suicide. I'm saying that you are trading wages for unemployment. Saying it's a bad thing isn't the same as saying it's suicide.

But you can't demonstrate that any change in wages changes employment.

Even you agree that a $1000/hr minimum wage would cause unemployment. For real-world values it generally comes down to lost in the noise unless you do things like look at teen unemployment. Lost in the noise doesn't mean zero.

Unemployment is not zero at a minimum wage of 0$, or even near zero, because being employed involves significant costs to the employee. This is why you get situations in Detroit where the bulk of unemployment is concentrated away from the local bus routes - because people can't get to a job without a car, and can't run a car without a job.

If wages were a penny an hour there would be nearby businesses that would hire them.

All you're demonstrating is that taking minimum wage to the extremes and trying to use each extreme to plot the middle doesn't work. Which it generally doesn't. Or to put it another way, you're taking a proposed small change, and insisting on figuring the result as if it were an infinite change. Which again, is a flaw in your reasoning.

No. I'm showing the shape of the graph. You are insisting the graph is more complex than this but you are providing no evidence of that greater complexity. Occam's razor says you're wrong.

 

[ksen]

Even you agree that a $1000/hr minimum wage would cause unemployment. For real-world values it generally comes down to lost in the noise unless you do things like look at teen unemployment. Lost in the noise doesn't mean zero.

"Lost in the noise" typically means "I can't prove it with hard data but I really, really believe it's true so it must be true."

 

[Togo]

This is an example of you taking a small change, and figuring the result as if it were an infinite change. This is a flaw in your reasoning.

I'm not figuring an infinite change. Look at what happened in 2008--even efficient suppliers were forced out of business.

So no suppliers lasted beyond 2008? Because if that's not what you're saying I'm not getting your point.

Coupled with a rather incomplete knowledge of the economics theories that you believe in and champion it leaves you rather poorly equipped to discuss these matters. If this is the way that all of your opinions are formed I would think that this observation would extend to almost any adult subject.

Your "economics" only make sense if there is an infinite pool of profit to take to fund your ideas.

No, it makes sense as long as the amount of profit is above zero. The idea that for there to be an amount above zero, there must be infinite profit, is the same flaw in your reasoning as above.

The point is that you are making no effort to compare the profit to what you are demanding they spend in most cases. Since there's no need to check the size of the pool it must be infinite.

No merely irrelevant. Why would it matter how much each company made as profit?

Among the rabid opponents of any increase in wages you stand out as the most determined. There is no exception to "this will cause unemployment" that you won't dismiss out of hand without any explanation, but with a simple chant, "no exceptions, any increase is economic suicide."

I'm not saying it's economic suicide. I'm saying that you are trading wages for unemployment. Saying it's a bad thing isn't the same as saying it's suicide.

But you can't demonstrate that any change in wages changes employment.

Even you agree that a $1000/hr minimum wage would cause unemployment. For real-world values it generally comes down to lost in the noise unless you do things like look at teen unemployment. Lost in the noise doesn't mean zero.

No, but it doesn't mean above zero either. What you're saying is that there is an effect, even if we can't see it. Which isn't a terribly compelling argument.

What is the reason that you think a small increase in the minimum wage would increase unemployment?

Unemployment is not zero at a minimum wage of 0$, or even near zero, because being employed involves significant costs to the employee. This is why you get situations in Detroit where the bulk of unemployment is concentrated away from the local bus routes - because people can't get to a job without a car, and can't run a car without a job.

If wages were a penny an hour there would be nearby businesses that would hire them.

But what would be the point in taking the job?

All you're demonstrating is that taking minimum wage to the extremes and trying to use each extreme to plot the middle doesn't work. Which it generally doesn't. Or to put it another way, you're taking a proposed small change, and insisting on figuring the result as if it were an infinite change. Which again, is a flaw in your reasoning.

No. I'm showing the shape of the graph.

No, you're assuming a graph, and assuming the graph must have a shape that adheres to your expectations, based merely on the two ideas that businesses wouldn't hire people for more money than they have, and would hire people they didn't really need if they were effectively free. That's no basis for assuming a relationship.

Guess what Occam's razor says about assuming relationships without any evidence?

 

[Loren Pechtel]

Even you agree that a $1000/hr minimum wage would cause unemployment. For real-world values it generally comes down to lost in the noise unless you do things like look at teen unemployment. Lost in the noise doesn't mean zero.

"Lost in the noise" typically means "I can't prove it with hard data but I really, really believe it's true so it must be true."

You're still not addressing the Occam's Razor issue. You're not providing any evidence of the increased complexity that you're insisting exists.

 

[SimpleDon]

Well, since I specifically said that they cannot operate at floor, then your read is incorrect.

I am sorry, I don't mean to misquote you.

I shouldn't have dumped all of this on you. It was something that I was thinking about for my list of "things I have learned from the internet." I have now posted my list above ^^ this somewhere. I am not disowning what I said, I am just saying that it wasn't responsive to your post.

I understand the concept of a floor that a provider can't operate under for a long time. I also understand that there are many different things considered costs. Someone here, who shall remain unnamed out of fear that I haven't gotten every nuance of their twelve word statement right, mentioned recovery of sunk costs, costs for capital that has depreciated to zero, but is still in use. A machine for example. These kinds of costs don't have to be recovered in order for the business to survive a down period in revenues.The business is operating at a loss but the cash flow is such that more cash is coming than is going out, but the owners aren't receiving any profits.

But you do realize that supply and demand don't determine the price completely. This puts you ahead of quite a number here.

Sure. Because I recognize that the model is only an approximation, and that reality is more complex.

You believe that supply and demand set the price but that average (not marginal) costs provide some hazy, long term limit to how low they can go and the producer stay in business. You have the right idea, it is just that you have it reversed, almost all prices are set by the supplier at average cost plus an anticipated profit and supply and demand are the hazy, long term limits to the success or failure of the business.

It don't think it's necessarily one direction or the other. It's a feedback loop. The consumer deccision is an individual decision: Will I personally purchase this product? Do I personally value this product at higher than the cost? But the Seller's decision is an aggregate decision: Will people in general purchase this product? Will enough people value this product at higher than this specific price? Would more people value this product at higher then another price, by enough to make the net profit larger? So the Seller has to try to estimate the individual supply-demand driven choices of many consumers, and decide on what price works for them based on that estimation.

When it's two individuals negotiating, they each give a little and reach an agreement that is higher than the seller's floor and lower than the consumer's budget... or there's no sale. But in the market, each individual makes a purchase decision against their budget (and against the competitor's product as an alternative option), and the seller makes a pricing decision against the assumption of how many purchasers will be willing to make that purchase decision in their favor.

It's the same concept... but it's the difference between the individual negotiation and the aggregate process.

Or comparing a product at a price against a substitute that gives us a greater deal of satisfaction, utility in Econ speak, even if it isn't a direct substitute in function, that is, "lawnmowers are so expensive now then that expensive rifle that I want is worth the money, I will buy the rifle now and a new lawnmower next year."

Buying decisions are not the cool rational decisions that mainstream economics says that they are, that much of mainstream economics needs it to be. Neither is the marketplace a bazaar where prices are bid up or down by people who have complete knowledge about the products. Producers are price givers and consumers are price takers. We either buy the product at the price offered or we don't. The producer doesn't wait to see what price his product sells for in the market, he sets a price and he sees how many units he sells.

The government hasn't decided that is the best way to do it, the market has decided that this is the best way. If the government wasn't involved we have no reason to believe that the market would become a bidding type market, it would most likely chose once again to be a price giver, prices taker market, exactly what it is today.

We are talking about the aggregate here, the effect on the economy as a whole. The net sum of all of the individual transactions.

This is a common mistake, the idea that the economy as a whole reacts the same way as an individual or a single company does. That you can take how you or I react and multiply it by 300 million and then we know how the whole economy will react. Supply and demand is a different animal when you are looking at and talking about the whole economy. The limits, the boundary conditions are different, the biggest difference is the role of money itself, to you and me money is life itself, the means of survival in the modern world.

But to the whole economy money is only important to provide the incentives individuals need to grow the economy, to innovate and to optimize the economy. Money is just paper, the macroeconomy can make as much of it as is needed.

And supply and demand are different. All of us assume that aggregate demand is downward sloping, that is as the price goes down the demand goes up. But economists haven't come anywhere close to proving that this true, when you look at the whole economy. The closest that they have come is proving it for exactly the case that you did, one consumer choosing between two products. But as soon as they add more consumers the model starts telling them conflicting stories, that the demand curve is horizontal, that is price doesn't matter, or that it has inflection points where the curve reverses slope, products become more in demand the more expensive they are, or that the curve is discontinuous which would mean that demand is not solely dependent on price or that it might have a time variability, both things that the real world outside of economics takes for granted as being true as evidenced by the existence of advertising or the acceptance of the concepts of fads and style.

I am sure that this is a repeat in some form of something that I have said before. I know that I repeat myself, I have only an limited understanding of these things myself. There is no big payoff coming from me. I am not going to tell you the universal truth that unlocks the secret of economics. But what I do know with a high degree of certainty is that mainstream economics and the so-called free market is not going down the correct path. They have concocted a fantasy economy when what we need is to understand the real one that exists.

If you are a member of the free market cult this what you are what you are hanging your intellectual hat on. It is pretty much bullsh*t form beginning to end. Enjoy.

I don't think that a completely unfettered market is the correct answer for everything. I think that some industries cannot "self-regulate", and I think that some industries require oversight. But I also think that there are a great many industries that work just fine without external regulations.

I do think that the supply-demand model is the best model for how and why people make the pricing and purchasing decisions that they make. The model makes certain assumptions regarding the degree of knowledge that is reasonably available by all parties in the negotiation, which is it's greatest weakness. But it seems to most accurately capture the process by which negotiation happens.

Once again, I didn't mean this as a response to you. I don't know what you believe beyond these few posts that I have read here.

You will have to explain to me what you mean by "But I also think that there are a great many industries that work just fine without external regulations."

If you mean that there are businesses that don't need regulations to force them to run ethically, that they would never try to form a monopoly or work children six days a week, 12 hours a day to lower their labor costs. I agree, I think that most companies are run ethically and don't need these regulations to force them to run their companies that way.

But they do need the regulations to make sure that they are not having to compete with companies that aren't so ethical.

In the same way whether or not the state that I live in has a law making armed robbery illegal has no bearing on whether or not I am going to commit an armed robbery. But I still want armed robbery to still be illegal and enforced to help prevent armed robberies and to reduce the chance that I will be robbed. The law is not what is preventing me from robbery, I don't need there to be a law to keep me from committing the crime. But I do need there to be an enforced law.

It is the same with regulations.

You have to be careful when you say that industries don't need to be regulated, especially if you mean it in the reasonable way that I outlined above. When the market fundamentalists say the free market doesn't need any government regulation, except to enforce contracts®™©, even for the other guy who might cut corners, they are making a very specific claim that the mechanism of supply and demand setting prices is strong enough that no other regulation is needed, EtEC®™©. And some skeptics asked how exactly would the mechanism of supply and demand be able to do this? Again the Market Fundamentalists made very specific claims to explain how the mechanism of supply and demand setting prices would replace third party regulation.

In this explanation there isn't room for waffling about the mechanism of supply and demand setting prices. It can't be an on again, off again kind of hazy far off long thing if it is the only thing that that is preventing bad behavior by any of the market participants.

You said that "I don't think that a completely unfettered market is the correct answer for everything." The market fundamentalists believe that unfettered markets are the answer to everything. I don't believe that this is what you are, but I do believe that you don't realize that it is is the most ethically run companies that benefit from regulation the most.

You said that supply and demand setting prices is a feedback mechanism. You are correct. But as such it means two things. One, that it must have a deviation from the norm before it can start to apply corrective action. In other words a problem has to exist before any corrective action can start, regulations try to prevent problems from happening.

And two, the feedback mechanism needs some amount of time to correct the deviation and the deviation, the problem, is going to exist for however long it is going to take to correct. If someone can figure out how long it is going to take and is in the position that they can force a deviation then they can make a whole lot of money in the months or even years that it takes for the feedback mechanism to correct it. And it is the nature of capitalism that if there are profits to be made by some action eventually it will happen.

The events leading up to the 2008 financial crisis are a perfect example of this. The bank and other financial institution executives who committed the mortgage fraud that caused the financial crisis and the Great Recession knew that what they were doing wasn't sustainable, that they were giving mortgages to people who weren't going to be able to make the payments after the teaser period of three years or so was over, that bundling the sub-prime loans with conforming loans didn't wash away the risk and make the resulting mortgage backed securities a safe AAA investment, maybe they even knew that home prices could go down, that their predatory lending scheme would fail because of it, that they would not profit from selling the foreclosed homes but that they would bankrupt the banks because the value of the homes would be much less than the values of the mortgages.

What they did know for certain was that they could make a whole lot of money for themselves in the three years or so until the problems became obvious and market forces corrected.

And they also knew that the government supervisory agencies wouldn't stop them because the agencies were headed by anti-regulation Bush administration appointees who had publicly pledged that they would cut the red tape and not stand in the way of innovation in the mortgage market. And of course as we have all learned with much regret, the Bush people meant it.

And because of the nature of the competitive nature of capitalism, banks that wouldn't have thought of going into the predatory mortgage lending business normally were forced into it to match the profits that the less ethical banks were earning.

I am sorry that once again I have rambled on. In my experience most people here are only interested in proving that they are right and in proving it by making one sentence responses, ignoring anything that they can't respond to without proving that they are wrong. Your explanations of what and why you believe something and your refreshing admissions of what is true of all of us, that there is a limit to your understanding of these things, is what encouraged me to do the same.

 

[BH]

Here's my two cents and you are free to take it or leave it. Since we are not able to see the books a business keeps we have no idea whether they could afford to pay more than miminum wage or not.

Also, keep in mind higher management lies to lower management. Case in point. I worked as a service manager for a grocery store. I was told in training, with the point pounded in, that the workers were entitled to so many breaks and a lunch for certain hours worked. They said it was the law. I find out later from an attorney friend the law (at least back then) said no such thing. He said what they were doing was lying to make people think it was the law to take the wind out of any attempt to install such as actual law. Also, it is a good way to cut back on clock time without letting people leave early, just in case you got a big rush on an otherwise slow day.

And I think it is common knowledge they keep two or even three sets of books---one for the workers to have as a goal and then the secret one where the high ups know if they are really getting the profit they want or not.

 

[Emily Lake]

SimpleDon, you have really long posts! I enjoy them, but I'm also going to trim a lot of it just to try to keep the thread reasonable for any other readers. If I miss something you feel is vital, let me know. Otherwise, I'm going to pick and choose a few things to respond to that I think are most interesting.

I am sorry, I don't mean to misquote you.

No worries. When there are many people all "talking" at once, it can be difficult to decide who to respond to first, and I am often challenged not to mix up who I'm responding to. I'm quite certain that at some point in the future I'll become passionate on a topic and roll a bunch of people all together into my "them" category. Then I'll be the one apologizing for tilting at the windmill I've constructed. It comes with the territory, and I rarely take it personally. If I do take it personally, you'll know, because I shall cease engaging with you!

Buying decisions are not the cool rational decisions that mainstream economics says that they are, that much of mainstream economics needs it to be. Neither is the marketplace a bazaar where prices are bid up or down by people who have complete knowledge about the products. Producers are price givers and consumers are price takers. We either buy the product at the price offered or we don't. The producer doesn't wait to see what price his product sells for in the market, he sets a price and he sees how many units he sells.

Of course no individual person is a cool rational decision-maker. Not individually. But our irrationalities at the individual level tend to cancel each other out in the aggregate. If 10 people hate a thing for no rational reason at all, there's usually an equal number of people who love it for no rational reason as well. Their lack of reasons cancel each other, because the random elements in their actions are just that - random. It's noise in the machine. What's left once all of these individual irrationalities are netted out, is the underlying predominantly rational actions of the aggregate. Trying to map the logic of any individual person's decisions is a losing battle. But trying to map the logic of a large group of people is a lot easier. The same thing is true for epidemiology, as an example: Trying to predict and model whether one specific individual will contract diabetes is pretty well impossible. The fit of the model is terrible. But trying to predict whether a large group of people will contract diabetes is much easier; the fit of the predictive model on an aggregate population is much better. The R-squared for an individual prediction is abysmal; the best I've seen is about 0.22 for diabetes (which is a fairly predictable disease all things considered). The R-squared for a population model is often around 0.8, and I've seen some models that run higher than that depending on what data you have access to. So I suppose the short story here is that large groups of people don't behave in the same inherently unpredictable and irrational way that individual people do; aggregations make a lot more sense than solo people.

For the remainder, no, it's not individual people bidding individually. Yes, companies are price givers, and consumers are price takers. But it's again not quite as black and white as you seem to think. Small companies have a lot of flexibility in their pricing, and they actually do a significant amount of price adjustment. They might start out giving a price that is too high... and they don't make the sales that they desire. So they lower their prices until they get the sales volume they want. It's not quite individual negotiations, but it's a proxy for it. It's still many consumers saying "no, that price is too high for my utility, I'm not going to purchase", until the seller brings their price down to a level that is acceptable to enough consumers.

Large companies, on the other hand, do market research. For established products with established prices (such as the price of a can of soda) there's no need to do research - the market has already settled on the "equilibrium" price. Notice that there's no difference between the cost of a can of Coke or a can of Pepsi or a can of something made by any other brand? That's the fungibility of that soda at work, and the equilibrium price of that good has already been found by the market. There are enough competitors that if any one seller raises the prices of their product, consumers will just replace it with a competitor.

But for new products, products without an established market price, companies do research. They do conjoint analysis surveys to determine what price is the most appropriate one. What price will bring in an optimal amount of revenue? If we price it just a little bit lower, will we make enough marginal sales to offset the difference in price? So in a way, that negotiation happens before the price is given to the market.

All of us assume that aggregate demand is downward sloping, that is as the price goes down the demand goes up.

I'm not an economist, by any means... but isn't the causal relationship backwards here? Dropping the price won't increase demand if none is there. It's the other way around. If demand increases, then you can increase your price.

This is in the form of "If A then B". What you've said above is "If B then A", which doesn't necessarily follow.

But as soon as they add more consumers the model starts telling them conflicting stories, that the demand curve is horizontal, that is price doesn't matter, or that it has inflection points where the curve reverses slope, products become more in demand the more expensive they are, or that the curve is discontinuous which would mean that demand is not solely dependent on price or that it might have a time variability, both things that the real world outside of economics takes for granted as being true as evidenced by the existence of advertising or the acceptance of the concepts of fads and style.

Advertising, fads, and styles are all factors that exert pressure on demand. They don't invalidate the concepts of supply and demand on the workings of price in a market. Induced demand due to the perception of cache and conferred status is still demand . It's simply not the kindergarten-level demand that we start out with in the simplest model.

Of course, as we've already covered, the model is still just a model. It's a representation of a complex system. It necessarily simplifies a complicated and multifaceted dynamic to the most material factors, and sets aside those factors that are less material. In doing so, it always makes assumptions about materiality based on past observations - and just because a given factor has been immaterial in the base period does not mean that it is always immaterial. Reality is complex.

One of the problems that is rampant on the internet is that many of the people who argue about the economy either never learned anything more complex than the simplest of price theory models... or they've forgotten that it's a model and isn't reality. That doesn't mean that most of the model doesn't still hold; it just means that we need to recognize and extrapolate from it where reality differs, and attempt to educate everyone else as we go. And of course, be open to education our selves - since I am not an economist, I'm quite certain there is a significant amount of information of which I'm ignorant. I know, for example, that I'm on very shaky ground when it comes to money theory and other macroeconomic bits.

If you mean that there are businesses that don't need regulations to force them to run ethically, that they would never try to form a monopoly or work children six days a week, 12 hours a day to lower their labor costs. I agree, I think that most companies are run ethically and don't need these regulations to force them to run their companies that way.

But they do need the regulations to make sure that they are not having to compete with companies that aren't so ethical.

Perhaps I err in drawing my own internal distinctions with this. I should have been more specific in regards to specifying "price and cost" regulations. There are any number of laws that affect business that I think are the proper role of government. Laws that govern what is and is not fraud or coercion, laws against exploitation and discrimination, safety regulations in the workplace, environmental protection and negligence laws - these are all things that I think are the province of government, in that they set rules about how one may treat fellow humans, and what risks one may place on another, or dangers one may subject another to, without their direct consent.

But I think that very many businesses do not require regulation with respect to pricing. I think that government should not, for the most part, be involved in determining whether a product is priced appropriately or fairly, nor should the government set the price for any product, nor should the government show preference for any company's product over another. That is the role of the market - that is where the utility and preference of the consumer, balanced against the desires and goals of the selling company, should be allowed to operate without interference. For the most part.

I previously noted that I allow some exceptions to a completely unfettered free market with respect to pricing. These exceptions are currently limited to two broad classes: monopolies and disparate information. For monopolies, I don't even hold that external pricing oversight is necessary for all monopolies, only for those of services of goods that are reasonably considered necessary, and for which there is no competitor. In that case, I do think it's the role of a government representative to protect the interest of the consumer against exploitation by the seller.

The case of disparate information is a bit more complex. There are some industries where the seller has significantly more information than the consumer can ever be reasonably expected to gain. "Buyer Beware" is simply not possible. Take for example, the case of medicine. If you go see your doctor, and he tells you that you have cancer and recommends radiation treatment and surgery, will you argue with him? The consumer might consider getting a second opinion, but the consumer is in no position to counter the doctor's opinion with valid information of their own. The general consumer isn't a doctor, and can't reasonably be expected to have the same knowledge as a doctor. Nor can they even be expected to be able to go do homework and even come close to the level of knowledge required to even opine on the validity of the diagnosis. The seller has expert knowledge that the general consumer simply cannot have access to. This is true of a lot of professional fields - the fields require expertise and specialized knowledge that the public relies on. But in so doing, they public is also placing their trust in those experts to not take advantage of that disparate level of knowledge.

The solution for those sorts of professions, in my opinion, is one that's already in place: professional governing bodies that have disciplinary authority. The oversight bodies provide licensing, and have the authority to remove the licensing from individuals who do not abide by their standards of conduct. This exists for doctors and lawyers already, in the form of the American Medical Association and the Bar Association. About the only tweak I would make is that I would expand the governing body to include not just representatives from within that field, but also members to represent consumers in general as well as the government. And I think it would be appropriate for those governing bodies to extend their auspices into the realm of pricing, rather than just licensing.

I am sorry that once again I have rambled on. In my experience most people here are only interested in proving that they are right and in proving it by making one sentence responses, ignoring anything that they can't respond to without proving that they are wrong. Your explanations of what and why you believe something and your refreshing admissions of what is true of all of us, that there is a limit to your understanding of these things, is what encouraged me to do the same.

I'm glad you're enjoying it. I'm often wrong, so I'm rarely worried about that! I'm always more interesting in learning why people think the things they think, so to me, this is fun!

 

[Emily Lake]

Here's my two cents and you are free to take it or leave it. Since we are not able to see the books a business keeps we have no idea whether they could afford to pay more than miminum wage or not.

Also, keep in mind higher management lies to lower management. Case in point. I worked as a service manager for a grocery store. I was told in training, with the point pounded in, that the workers were entitled to so many breaks and a lunch for certain hours worked. They said it was the law. I find out later from an attorney friend the law (at least back then) said no such thing. He said what they were doing was lying to make people think it was the law to take the wind out of any attempt to install such as actual law. Also, it is a good way to cut back on clock time without letting people leave early, just in case you got a big rush on an otherwise slow day.

And I think it is common knowledge they keep two or even three sets of books---one for the workers to have as a goal and then the secret one where the high ups know if they are really getting the profit they want or not.

There are usually two or three sets of books, but it's not generally for the reasons you cite. It's usually because the govenrment has some very strange rules that sometimes don't do a very good job of reflecting reality.

So for example, corporations are required to keep STAT books - books for Statutory Reporting, which are in accordance with Statutory Accounting Rules. These are used to report their financial position to pretty much all the various government agencies except the IRS. The IRS requires a different set of rules for tax purposes, so companies keep another set of TAX books that reflect the rules that the IRS uses for tax accounting. But neither of those are actually very good at reflecting reality (please don't ask me to delve into the differences, this is as deep as my memory goes). If the company wants to have a good idea of how they're actually doing in real life... then they use Generally Accepted Accounting Procedures, or GAAP books.

I'm not certain what the rules are around which companies have to submit their annual filings and which do not. I believe that all publicly traded companies do, but beyond that I'm simply not sure. Many companies have their annual filings available on line. I one were so inclined, one could go find out whether a given company could have afforded to pay a higher minimum wage in a past year. It won't necessarily help you determine what the impact will be in the future - but it could answer whether it would have been true in the past.

As far as companies lying about laws regarding breaks and lunches... that's sadly not uncommon. My impression is that it's rarely intentional so much as ignorance. Many small business owners don't understand the laws, and many times their interpretation of the regulations are very, umm, interesting. But I certainly admit that there are undoubtedly some downright jerks out there exploiting their workforce as well. I just don't tend to think that it's the majority.

 

[Canard DuJour]

- It's a liberal myth that employer profits increase when labour is cheap.

- Minimum wage increases reduce employer profits, leading to layoffs and inflation.

 

[SimpleDon]

Look at what is happening in areas of high hurricane threat. They're being required to sell homeowners policies at far below cost if they want to do business at all.

Or look at the big blowup with medical malpractice insurance rates at the turn of the century--the trigger there was the biggest underwriter deciding that they couldn't make a profit at the rates they were allowed to charge and they simply quit writing medical malpractice insurance. It's not that rates really spiked, it's that the biggest, lowest price company pulled out of the market.

So you are defining "total loss" to now mean "having to accept somewhat lower profits."

1) I'm not the one that used "total loss".

So this not your post?

....

And occasionally regulators make companies sell at a total loss--if you want to sell anything you have to sell this at the price we specify. (Common with insurance.)

If you can't even remember your posts and your own positions I don't really know what you are doing here.

So how do you defend your statement that government agencies are forcing insurance companies to accept a total loss; do you admit a mistake, do you ignore it and hope that no notices, do you try to redefine "total loss," or do you continue to try to buff your way out?

2) The reaction of business to the situation depends on the profit margin:
2a) Acceptable profit. They remain in business, if a business fails for some reason it's likely a new player will enter.

So in this case the business can and will stay in business, pay the higher wage and earn less profit. If they want more profit they will have to innovate and become more profitable.

I have to say that this is the choice that we want, wouldn't you? And now the question is how many of the businesses in the whole economy are in this category? Since the vast majority of businesses in the US have no workers earning the minimum wage and those who do the workers who earn the minimum wage are few in number, with more earning higher wages I would say that more than 99.9% of all of the businesses in the country are in this category for a $3 raise in the minimum wage phased in over 3 years.

2b) Unacceptable profit. They will generally remain in business but there will generally not be any new entrants to the field to replace those that fail.

So all of the suppliers who are in business making a profit before the increase will still be in business after the increase producing the same amount of product and will still be making a profit. It is just that in this category the businesses that fail for some other reasons wouldn't be replaced by entirely new businesses coming into the business?

So now we have to estimate how many of the 0.1% of the businesses in the total economy that are in not category 2a) will fail even though they are making a profit. I'd have to say that this would be a very small number, say only 0.1% of the 0.1%.

But we are forgetting something here, that as I pointed out before the more efficient businesses that are in the same business as these few failed category 2b) businesses in category 2a) would be more than happy to increase their own production to make up the lost production from the few category 2b) businesses that failed for reasons other than running at a loss. That is assuming that there are more efficient businesses and less efficient businesses which is something that Loren Pechtel Classical Economics™ doesn't accept but which is the case in the real world) and that there are businesses that unlike Loren Pechtel Enterprises® can successfully increase their production (which there are in the real world) then the need for new businesses entering the business to replace those that failed even though they were making a profit, abet an unacceptable one.

2c) Above marginal costs but below total costs. There will definitely be no new entrants, attrition will be heavy.
2d) Below marginal costs. Businesses will cease operations as fast as they can.
in the C and D cases bankruptcies very well might happen.

And the question is how many businesses this will be, businesses who were profitable before and once again we are only concerned about the businesses that fail whose production is not replaced in a country where we are currently utilizing only 75% of our potential production, we are now talking about very few businesses I would think.

And here is marginal cost again. Marginal cost is the direct costs of producing the last unit of production. It doesn't include any indirect costs, minor details like rent and the salaries of the management.

Total cost includes all of the indirect costs. It is what the non-economist would call the the average cost per unit. So if marginal costs is less than the total cost per unit and the price that supply and demand is driving the price down to is based on the marginal costs then the producer will be losing money. Obviously the marginal cost of last product produced has to be higher than the total cost for there to be any profit.

You think right now that what I just said is crazy, that I have to be wrong. But you can't quite figure out where I am wrong. It is because I have explained the theory to you, the theory that you are devoted to, the theory that has to be right for the market to self-regulate. But you also have enough business experience to know that the marginal cost is of the last produce made is lower than the average cost per unit.

It isn't your business experience that is wrong, it is the theory that is wrong.

The theory assumes that the marginal cost will be higher than the average cost per unit because of diminishing returns. That the cost curve across the all of the units produced is "U" shaped, that for the first units produced the economies of scale lowered the cost per unit down. Then at some point you start to hit diminishing returns and the costs per unit start to increase.

The economists who came up with this idea that the market could self-regulate by supply and demand driving the price to the marginal product cost did so concentrating on agriculture. And in agriculture the production cost curve is "U" shaped, diminishing returns does kick in as you try to get more out of a single acre of land, especially in the 19th century when the theory was developed. Also in agriculture the idea of forcing the maximum efficiency out of each acre of land is valid.

But this theory falls apart in an industrial economy. Indirect costs are much higher in industrial production than in 19th century agriculture. Since these indirect cost are in the total costs and not in the marginal product cost it means that diminishing returns must push the marginal product costs even higher to produce profits when supply and demand push prices down to the marginal product cost. But it is not the case, if anything diminishing returns has much less impact in industry than in agriculture. The entire thrust of industrialization, of the formation of the large corporations can be summed up as a push to achieve economies of scale and to avoid diminishing returns.

As if this isn't enough, the idea of obtaining the maximum efficiency in the economy by forcing the the inefficient producers out of business and maximum use of the surviving production facilities achieves nothing but increasing the instability of the economy as a whole since there would be no extra capacity to respond to extraordinary events, whether it is a surge in demand or the failure of one of the production facilities.

The idea of limited production resources is not as straightforward in an industrial setting as it is in agriculture where there is a definite limit to the amount of arable land. But it is not so obvious that there is any limit to industrial production facilities nor do we seem to gain any benefit from treating them as being limited.

And no you can't include the indirect costs in the marginal product cost, then you would either be not recovering the indirect costs or you would recover more indirect cost than you have actual indirect costs, neither achieve the sought after efficiency.

And no, you can't have supply and demand force prices to something greater than the marginal product, it is the way that supply and demand takes pricing out of the control of the producers, the very essence of supply and demand allowing the free market to self-regulate.

This is not anything that I think that makes any sense, but I seem to have explain to market enthusiasts what their theory is so that they can make any sense out of my criticism of the theory. The theory that they claim to believe in without any real understanding of what the theory says.

A cynic would be say that it is not the power of the logic in the theory that attracts so many people to support it, but its conclusion, that the evil government doesn't have to interfere in the economy, that the free market can self-regulate. An utterly ridiculous idea on so many levels.

I have gone on again, I will break it here, continued below.

 

[Loren Pechtel]

So you are defining "total loss" to now mean "having to accept somewhat lower profits."

1) I'm not the one that used "total loss".

So this not your post?

Poor wording. I meant at a price below their marginal cost.

2) The reaction of business to the situation depends on the profit margin:
2a) Acceptable profit. They remain in business, if a business fails for some reason it's likely a new player will enter.

So in this case the business can and will stay in business, pay the higher wage and earn less profit. If they want more profit they will have to innovate and become more profitable.

I have to say that this is the choice that we want, wouldn't you? And now the question is how many of the businesses in the whole economy are in this category? Since the vast majority of businesses in the US have no workers earning the minimum wage and those who do the workers who earn the minimum wage are few in number, with more earning higher wages I would say that more than 99.9% of all of the businesses in the country are in this category for a $3 raise in the minimum wage phased in over 3 years.

What you are missing is that adding costs on business can move them from one category to a lower category.

So all of the suppliers who are in business making a profit before the increase will still be in business after the increase producing the same amount of product and will still be making a profit. It is just that in this category the businesses that fail for some other reasons wouldn't be replaced by entirely new businesses coming into the business?

1) As they fail the supply of the good will go down. Just look at generic medicines mostly paid for by the government for examples. Shortage after shortage after shortage. Of course there are "reasons"--but the fundamental reason is that there isn't enough margin to make spending effort on ensuring a continuing supply worthwhile.

2) As I said above, the costs can move companies into lower categories.

Total cost includes all of the indirect costs. It is what the non-economist would call the the average cost per unit. So if marginal costs is less than the total cost per unit and the price that supply and demand is driving the price down to is based on the marginal costs then the producer will be losing money. Obviously the marginal cost of last product produced has to be higher than the total cost for there to be any profit.

You think right now that what I just said is crazy, that I have to be wrong. But you can't quite figure out where I am wrong. It is because I have explained the theory to you, the theory that you are devoted to, the theory that has to be right for the market to self-regulate. But you also have enough business experience to know that the marginal cost is of the last produce made is lower than the average cost per unit.

1) It's quite possible to have a profit when the marginal cost is below the total cost. In fact, it's common when dealing with perishable goods.

2) Supply and demand normally does not drive prices below cost + reasonable profit. It can in the short run, when that happens companies bleed and sometimes fail. (Think of the wide swings that used to happen to computer memory prices. That was a result of the long lead times and failing to guess the demand adequately. You run the chip fabricator so long as you can sell the chips for more than their marginal cost.)

The theory assumes that the marginal cost will be higher than the average cost per unit because of diminishing returns. That the cost curve across the all of the units produced is "U" shaped, that for the first units produced the economies of scale lowered the cost per unit down. Then at some point you start to hit diminishing returns and the costs per unit start to increase.

I disagree. That only happens if you are pushing too hard. You're generally better off not chasing that last little bit of profit.

As if this isn't enough, the idea of obtaining the maximum efficiency in the economy by forcing the the inefficient producers out of business and maximum use of the surviving production facilities achieves nothing but increasing the instability of the economy as a whole since there would be no extra capacity to respond to extraordinary events, whether it is a surge in demand or the failure of one of the production facilities.

If companies are allowed to make a reasonable profit they will make a reasonable ability to respond to spikes in demand.

When it comes to huge spikes in demand related to very low probability events the only way that will be addressed is by stockpiling and that's normally done by the government (or by the government paying the manufacturer to stockpile--it can be cheaper to avoid the handling and turnover costs.)

The idea of limited production resources is not as straightforward in an industrial setting as it is in agriculture where there is a definite limit to the amount of arable land. But it is not so obvious that there is any limit to industrial production facilities nor do we seem to gain any benefit from treating them as being limited.

And no you can't include the indirect costs in the marginal product cost, then you would either be not recovering the indirect costs or you would recover more indirect cost than you have actual indirect costs, neither achieve the sought after efficiency.

It sounds like you're saying companies should sell simply above their marginal costs. I see this idea from the left many times--it ignores the fact that in such a marketplace there will be no investment, over time the production capacity will drop off and not be replaced. You don't see a sharp crash in production, you think you got away with it.

This is not anything that I think that makes any sense, but I seem to have explain to market enthusiasts what their theory is so that they can make any sense out of my criticism of the theory. The theory that they claim to believe in without any real understanding of what the theory says.

As you say, you can't make sense of it--because it's not true. This is just another variation on eating your seed corn.

 

[SimpleDon]

Continued from above.

Businesses being forced out of business is part of the creative destruction of capitalism.

Inefficient producers are forced out. I'm talking about systemic problems that affect an industry. These are either caused by regulators or by big economic problems.

So you are now assuming that there are inefficient and efficient producers? You complained that I couldn't assume that there are efficient suppliers to replace the production of the inefficient ones that go out of business. But you can?

If raising wages causes businesses out of business so be it. I trust capitalism to adapt and to be stronger, just like it did after child labor was prohibited and hundreds of other restrictions were placed on unfettered capitalism. Why don't you trust it to adapt?

Wages that rise naturally are not a problem. Inefficient producers are forced out and replaced with efficient ones. However, when you mandate wage increases you have a very different situation--there's no supply of good jobs to replace the ones that fail. Thus you get unemployment.

I am not sure that this is a very convincing argument, that you have a very different situation when you mandate wage increases than when you have a natural wage increase. You previously had relied on the the theory of marginal product to explain why the wage increase will causes non-massive unemployment in the overall economy. It was not very convincing either but it is better this, which is just a statement of an assumption as a fact with no obvious theoretical or empirical support. Just that mandated wage increases are different than a natural wage increase and in some vague way the jobs are lost from the businesses that fail are not replaced after a mandated increase but they are after a voluntary increase. Like any good yous assume that what you want to prove is true and use that assumption to prove itself.

I think that you would have to agree that I have a better grasp of the neoclassical theory that supports the idea of unemployment after a wage increase. Then you will trust me when I tell you that the theory of marginal product, that since supply and demand sets the prices at the marginal product and we hire people until their marginal product is the same marginal product as the price setting one, etc., etc., that it doesn't distinguish between a mandated wage increase and a voluntary wage increase, that any wage increase would create unemployment. Even if the CEO's wage is increased.

Or maybe you did realize that marginal product theory does require that any wage increase or any cost increase for that matter results in unemployment. So that you can only use marginal product cost as a reason for unemployment, that you can't use it to prove that there is a difference between a voluntary wage increase and an involuntary wage increase. So for this question you have to use a different argument, this argument that if we assume that involuntary wage increases cause unemployment and voluntary wage increases don't then we know without a doubt that only involuntary wage increases cause unemployment.

We are not trying to perfect capitalism, we are using it to produce better results for society and its members. Capitalism is resilient enough that we can do this. Why don't you believe that it is?

But full employment is not a goal of capitalism. Inefficient producers are cast aside--even when they are workers.

Yes, this is just one of many arguments that support the government manipulating capitalism to prevent workers from being cast aside. These are real people, there is no reason to cast them aside. Even if the imperfect mechanism of capitalism decides that they should be cast aside.

As I have said repeatedly here, without any objections, that the economy exists to develop society's resources including its most important human capital, to bring those resources into production and to distribute that production to the society's members.

If this is not your idea of why the economy exists tell me what you think that the economy should do. Is it a grand experiment to see if capitalism can run without government interference no matter how poor the results? Or perhaps it is to see how many different different kinds of useless, zero sum financial instruments Wall Street can come up with to divert monetary capital from productive investments. Or it exists to divert as much money as possible to the already rich?

To me these seem to be the reasons that you believe the economy exists based on your posts. Correct me if I wrong.

The economy doesn't exist to perfect capitalism. Its job is to make real products and to distribute those products to all of the members of society. And the implication is that it is not to distribute the rewards of the economy poorly, but to distribute them somewhat equably.

Capitalism is the tool that we use to accomplish these goals. But capitalism is not without flaws. There is no reason that we have to live with the flaws as you are suggesting. Just because you believe capitalism is a frail, delicate mechanism that crumbles when it is manipulated doesn't mean that it is. Some of us can look at all of the ways that the very structure of capitalism is manipulated in other countries to overcome its flaws such as casing aside of people

I don't know why I bother, you are just going to do what you always do, ignore my points that you have no answer for, by far the majority of them, and selectively edit some of my statements until you can feel free to misrepresent them and to never admit defeat even if you have to resort to endlessly repeating your few memorized talking points that you have no idea of their full meaning.

I am going to break here, to feed my delusion that doing so makes my posts look less like what they are, a wall of words.

 

[SimpleDon]

Continued from above.

Look at 2008. So long as the failures don't spike you just get the normal turnover. When they do spike you get big problems.

You must look at why they failed. It wasn't because of the rise in the minimum wage in 2007. It was because of the failure to regulate the financial market and their mishandling of financial 'innovation' in the form of mortgage backed securities, just another attempt by the financial markets to capture part of the huge amount of capital that has been redistributed from wages over the last thirty years.

I didn't say they failed due to a minimum wage increase. I'm talking about the effects of too many failing. We still haven't crawled back out of that hole and you want to dig deeper.

So your concern is only for the increased unemployment that your reading of economic theory says is inevitable but that we have never seen in the real economy. And this theory that you depend on includes the theory that a wage increase of 20 billion dollars has to come from a non-existent infinite pool of profits.

So we are back to the argument that supply and demand set prices except when they don't. And when they don't is when I need to prove that increases in the minimum wage causes unemployment and recessions like occurred in 2008.

There are two factors:
Supply & demand and the price floor (cost + reasonable profit). If there is a shortage supply & demand rules, if there is no shortage competition forces the price to the floor--and since we generally have enough goods available things which are competitive are generally priced not far above the floor.

As we have already seen in my discussion above this statement of yours is pretty much a standard free market apologist's explanation of how supply and demand forcing prices down to the marginal cost achieves the miracle of forcing the most efficient use of resources and how it achieves the even greater miracle of self-regulation, but with the curious addition of the " + reasonable profit."

This is kind of the crux of the matter here. You are are trying desperately to reconcile a somewhat muddled understanding of neoclassical free market economic theory with what you know of how businesses really set prices. Your mistake isn't in your understanding of how businesses set prices or in the fact that they do set prices, it is in believing that the neoclassical theory of supply and demand driving prices down to the marginal product is capable of achieving the miracle of self-regulation.

A belief that I think comes not from your appreciation of the neoclassical free market theory's stone wall logic as it does from your dislike of the government and your desire to see them out of the economy and out of controlling your life. So much so that you are willing to all of our future wellbeing to a blind, solely reactive, uncertain, untested mechanism like free market capitalism.

Anyway, I doubt that this statement ^^ above by you solicited the response below vv by me. But it is late and I don't have the energy to search for original post that you edited.

Ah, yes, the killer argument of the infinite pool of profits. Of course I don't believe in an infinite pool of profits that we can pull from to fund everything. You should have more pride than this Loren. You can do this, you can arrive at a coherent explanation without using such ridiculous arguments. Here is a coherent description of what happened and why, one that relies on facts and local conclusions from those facts.

Except your argument makes no sense if you don't assume it.

What argument? That if we raise wages we will reduce profits? Why does this require an assumption of an infinite pool of profits? If my employer gives me a twenty dollar a week raise he is reducing profits by twenty dollars a week. There is nothing about this that requires an infinite pool of profits.

The CBO, an agency that no one has accused of being filled with radical economists, estimates that raising the minimum wage to $10.10 an hour will increase wages by 19 billion dollars a year and reduce profits by 17 billion dollars a year. The difference of 2 billion dollars a year is increased profits because the minimum wage workers have a greater propensity to spend than the people who receive the profits. There is nothing about this that assumes an infinite pool of profits.

The swing of ~$20 billion dollars is a drop in the bucket in a 17 trillion dollar economy. Yet you feel that it could cause the same degree of a massive crisis and recession with 10% unemployment that the incompetence of the Bush administration appointees who insanely believed the financial market could be trusted to self-regulate, primarily because they believed the same ridiculous economic theories that you are relying to tell us that an increase in the minimum wage always results in unemployment.

There is nothing that I see about assuming that an infinite pool of profits has to exist to increase wages that is coherent. It is your assumption, not mine. And no, I don't want to fund everything from profits.

Where is the assumption about an infinite pool of profits?

In the late 1970's and early 1980's neoclassical economists, conservative politicians and the very wealthy all agreed that the economy was suffering from too little capital investment. They had always said this, but at that point in time it was possible that it was marginally close to being true, although it didn't have anything to do with the economic problems that we were having at the time, stagflation caused largely by the oil price shocks. But they also agreed on something else, that it was the government's fiscal policies that were starving the economy of capital and were over rewarding labor. So the fiscal policies were changed. And capital started to accumulate and wages started to drop.

I don't see this wage drop you are referring to. What I see is a shift from good jobs being hourly to good jobs being salaried--and those who want to pretend there's a wage drop just look at the hourly data.

I have to seriously question your reading comprehension. I am talking about the shift from rewarding labor to rewarding capital, from paying wages to taking profits. This happened because of intentional changes in the nation's fiscal policies. Were you not alive in 1980? Can you use Google? If so search for "supply side economics" or "Reaganomics." Read. Come back and tell us what you learned. Hopefully it will clear up some of the confusion.

If you don't understand what was done then and how it was done I can see why you would have problems with real economics. Was your memory wiped clear?

Perhaps your incoherent idea that wage increases have to be funded from an infinite pool of profits in your mind has a reciprocal that increases in profits have to be funded from an infinite pool of wages? I don't know how deeply your illogical and incoherent thinking goes and I am seriously questioning why I should care right now.

This is the last my of my three responses to the first of three responses LP made to my three previous responses that I made to LP's original post. At this rate of geometric progression LP and I, and mainly I, will fill the discussion board's servers in another two rounds. This is because of my stubbornness to answer every one of LP's points and his stubborn refusal to answer the majority of mine.

I am taking all of the responses in order, not just to Loren but to everyone. These take me hours to complete, I ask for patience from the few that might care.

 

[SimpleDon]

Why this redistribution of money occurred is strangely considered to be a mystery today. I can clear it up in one two paragraphs.

In the late 1970's and early 1980's neoclassical economists, conservative politicians and the very wealthy all agreed that the economy was suffering from too little capital investment. They had always said this, but at that point in time it was possible that it was marginally close to being true, although it didn't have anything to do with the economic problems that we were having at the time, stagflation caused largely by the oil price shocks. But they also agreed on something else, that it was the government's fiscal policies that were starving the economy of capital and were over rewarding labor. So the fiscal policies were changed. And capital started to accumulate and wages started to drop.

Fast forward to today. Now neoclassical economists, conservative politicians and the very wealthy claim to have completely forgotten that government fiscal policies determine the split between capital share and the labor share, something that they were so certain of in 1980. They currently believe that the redistribution of income favoring capital was due to either unknown and unknowable economic forces or the magical appearance of some of the very same changes that were the results of the policy changes that they fought so hard for thirty five years ago, changes like the effective suppression of the minimum wage, globalization and weaker unions. Silly people, right?​

See, coherent and logical, unlike hanging your argument on something as ridiculous as people having to believe that there is an infinite pool of profits.

My understanding is the big change was the result of computer technology and telecommunications, air transportation etc. all of which made possible the global economy. The productivity gains pretty much all went to management. Less labor was required, ending a century old trend of real rising wages for labor in the US. The civil rights and women's movements also put pressure on the labor market.

Instead of raises, workers were offered unsecured loans in the form of credit cards.

Yes, those were part of it, but only a very small part. The shift from rewarding wages to rewarding capital, profits, started long before the gains in productivity from the use of the computer, at least fifteen years. Before Reaganomics the benefits from productivity gains were split between wages and profits. One of the main ways that Reaganomics worked to build capital was by changing this is to only reward capital with the gains from productivity. Reaganomics did this by eroding labor's ability to negotiate wages collectively by suppressing the unions.

And globalization was started not by the internet, once again, you are fifteen years too early between the start of globalization and the widespread use of the internet for business globalization. The calls for free trade as it was called then came from a surprising source, businesses and the people who would later be called movement conservatism. They had previously shared the desire for high custom duties with labor. Whether they intended it or not the net result of free trade was to expose American workers to competition from much lower paid workers in other countries.

And yes, the reaction of the wage earners to their reduced circumstances was to borrow money. Combined with movement conservatism's promotion of the interests of Wall Street and the broader financial industry which resulted in the virtual abandonment of the concept of usury, the results were predictably disastrous, debt deflation.

 

[Loren Pechtel]

Continued from above.

Inefficient producers are forced out. I'm talking about systemic problems that affect an industry. These are either caused by regulators or by big economic problems.

So you are now assuming that there are inefficient and efficient producers? You complained that I couldn't assume that there are efficient suppliers to replace the production of the inefficient ones that go out of business. But you can?

I am simply saying there's always a range.

What I objected to with your position is the notion that there are *MORE* efficient producers adequate to take up any amount you take away.

I am not sure that this is a very convincing argument, that you have a very different situation when you mandate wage increases than when you have a natural wage increase. You previously had relied on the the theory of marginal product to explain why the wage increase will causes non-massive unemployment in the overall economy. It was not very convincing either but it is better this, which is just a statement of an assumption as a fact with no obvious theoretical or empirical support. Just that mandated wage increases are different than a natural wage increase and in some vague way the jobs are lost from the businesses that fail are not replaced after a mandated increase but they are after a voluntary increase. Like any good yous assume that what you want to prove is true and use that assumption to prove itself.

How can you not see the difference? When wages rise naturally it's because there are higher paying jobs available. When you mandate a wage increase there are no such jobs available.

 

[Loren Pechtel]

This is kind of the crux of the matter here. You are are trying desperately to reconcile a somewhat muddled understanding of neoclassical free market economic theory with what you know of how businesses really set prices. Your mistake isn't in your understanding of how businesses set prices or in the fact that they do set prices, it is in believing that the neoclassical theory of supply and demand driving prices down to the marginal product is capable of achieving the miracle of self-regulation.

No, the crux of the matter is that you don't want to accept the reality of economics conflicts with your notions of how things should be.

The CBO, an agency that no one has accused of being filled with radical economists, estimates that raising the minimum wage to $10.10 an hour will increase wages by 19 billion dollars a year and reduce profits by 17 billion dollars a year. The difference of 2 billion dollars a year is increased profits because the minimum wage workers have a greater propensity to spend than the people who receive the profits. There is nothing about this that assumes an infinite pool of profits.

CBO estimates are basically worthless. The problem is that they are no better than their inputs--and their inputs are often garbage. The problem is not the economic data, but that they are not allowed to call bullshit on what they get from Congress.

Besides, your numbers don't even address unemployment. I've never denied that raising minimum wage will help *SOME* people. I'm saying the harm it causes (lost jobs/reduced hours) is worse than the benefit.

There is nothing that I see about assuming that an infinite pool of profits has to exist to increase wages that is coherent. It is your assumption, not mine. And no, I don't want to fund everything from profits.

The infinite pool of profit comes from your assumption that there is no need to evaluate if there is enough profit to fund what you want to take. The only way that it's valid to ignore this is if the pool is infinite.

Where is the assumption about an infinite pool of profits?

I don't see this wage drop you are referring to. What I see is a shift from good jobs being hourly to good jobs being salaried--and those who want to pretend there's a wage drop just look at the hourly data.

I have to seriously question your reading comprehension. I am talking about the shift from rewarding labor to rewarding capital, from paying wages to taking profits. This happened because of intentional changes in the nation's fiscal policies. Were you not alive in 1980? Can you use Google? If so search for "supply side economics" or "Reaganomics." Read. Come back and tell us what you learned. Hopefully it will clear up some of the confusion.

I'm saying you're basing it on a false premise.

 

[SimpleDon]

Why this redistribution of money occurred is strangely considered to be a mystery today. I can clear it up in one two paragraphs.

In the late 1970's and early 1980's neoclassical economists, conservative politicians and the very wealthy all agreed that the economy was suffering from too little capital investment. They had always said this, but at that point in time it was possible that it was marginally close to being true, although it didn't have anything to do with the economic problems that we were having at the time, stagflation caused largely by the oil price shocks. But they also agreed on something else, that it was the government's fiscal policies that were starving the economy of capital and were over rewarding labor. So the fiscal policies were changed. And capital started to accumulate and wages started to drop.

Fast forward to today. Now neoclassical economists, conservative politicians and the very wealthy claim to have completely forgotten that government fiscal policies determine the split between capital share and the labor share, something that they were so certain of in 1980. They currently believe that the redistribution of income favoring capital was due to either unknown and unknowable economic forces or the magical appearance of some of the very same changes that were the results of the policy changes that they fought so hard for thirty five years ago, changes like the effective suppression of the minimum wage, globalization and weaker unions. Silly people, right?​

See, coherent and logical, unlike hanging your argument on something as ridiculous as people having to believe that there is an infinite pool of profits.

My understanding is the big change was the result of computer technology and telecommunications, air transportation etc. all of which made possible the global economy. The productivity gains pretty much all went to management. Less labor was required, ending a century old trend of real rising wages for labor in the US. The civil rights and women's movements also put pressure on the labor market.

Instead of raises, workers were offered unsecured loans in the form of credit cards.

My main point was that thirty five years ago neoclassical economists, movement conservatives and the very wealthy were absolutely convinced that the government policies determined the split between labor share and the capital share. So the policies were changed. Today the same people tell us that this not the case, that there are a lot of reasons that the economy is now rewarding capital more and labor less but the government fiscal policies that were changed starting thirty five years aren't the reason.

The promise of supply side economics was that providing more income to the very wealthy would result in more investment, more jobs and more growth in the economy and widespread property. The purpose of the idea wasn't to provide more money to the wealthy, it was the way that the scheme worked. Everyone knew that the combination of lower taxes on the wealthy and wage suppression for everyone else would increase the income of the wealthy.

We all know what happened, GDP growth dropped by ½% to 1% a year and investment by business has been lower lower too every year since. What happened was that lower wages as a percentage of GDP means less demand in the economy. Lower demand means that there is less incentive to invest.

What happened to the ~$20 trillion dollars that was transferred to the wealthy rather than paid as wages as they would have been had the 1970's labor share of GDP stayed constant through those years? Ironically most of it is in US government debt that were used to finance the lower taxes that Reaganomics required to bring us its benefits of lower growth and investment.

Lacking incentives to invest in production facilities the money found its way into one asset bubble after another, in the stock market, the commodities market and in real estate, most notably in home mortgages in the 00's which lead to the Great Financial Crisis and Recession of 2008.

As to the increase in female and minority labor, yes, this also suppressed wages. But the labor participation rate now is at historically low rates. The same forces were handled by other countries and they even increased their participation rate (the % of adults who are working.)

We are hurting the economy by continuing these policies to intentionally transfer more and more money to the wealthy. Surely there can be no one who believes that the country is better off because of it. The extra capital has not brought the benefits that those who championed the idea thirty five years ago promised I have a feeling that the wealthy would be willing to see the experiment go on for another thirty years or so to see if it finally works. But why does anyone else want to continue?

Even if you believe that there are a lot of other factors that have caused this shift, there is still no reason to continue these policies. We need to start restoring some balance between total supply, capital, and total demand, wages. We are short of demand, resulting in low capacity utilization, low employment and high private debt. Among others.

 

[Horatio Parker]

My understanding is the big change was the result of computer technology and telecommunications, air transportation etc. all of which made possible the global economy. The productivity gains pretty much all went to management. Less labor was required, ending a century old trend of real rising wages for labor in the US. The civil rights and women's movements also put pressure on the labor market.

Instead of raises, workers were offered unsecured loans in the form of credit cards.

My main point was that thirty five years ago neoclassical economists, movement conservatives and the very wealthy were absolutely convinced that the government policies determined the split between labor share and the capital share. So the policies were changed. Today the same people tell us that this not the case, that there are a lot of reasons that the economy is now rewarding capital more and labor less but the government fiscal policies that were changed starting thirty five years aren't the reason.

The promise of supply side economics was that providing more income to the very wealthy would result in more investment, more jobs and more growth in the economy and widespread property. The purpose of the idea wasn't to provide more money to the wealthy, it was the way that the scheme worked. Everyone knew that the combination of lower taxes on the wealthy and wage suppression for everyone else would increase the income of the wealthy.

We all know what happened, GDP growth dropped by ½% to 1% a year and investment by business has been lower lower too every year since. What happened was that lower wages as a percentage of GDP means less demand in the economy. Lower demand means that there is less incentive to invest.

What happened to the ~$20 trillion dollars that was transferred to the wealthy rather than paid as wages as they would have been had the 1970's labor share of GDP stayed constant through those years? Ironically most of it is in US government debt that were used to finance the lower taxes that Reaganomics required to bring us its benefits of lower growth and investment.

Lacking incentives to invest in production facilities the money found its way into one asset bubble after another, in the stock market, the commodities market and in real estate, most notably in home mortgages in the 00's which lead to the Great Financial Crisis and Recession of 2008.

As to the increase in female and minority labor, yes, this also suppressed wages. But the labor participation rate now is at historically low rates. The same forces were handled by other countries and they even increased their participation rate (the % of adults who are working.)

We are hurting the economy by continuing these policies to intentionally transfer more and more money to the wealthy. Surely there can be no one who believes that the country is better off because of it. The extra capital has not brought the benefits that those who championed the idea thirty five years ago promised I have a feeling that the wealthy would be willing to see the experiment go on for another thirty years or so to see if it finally works. But why does anyone else want to continue?

Even if you believe that there are a lot of other factors that have caused this shift, there is still no reason to continue these policies. We need to start restoring some balance between total supply, capital, and total demand, wages. We are short of demand, resulting in low capacity utilization, low employment and high private debt. Among others.

That technology enabled the vision that led to the policy changes is my point. It didn't happen in a vacuum.

No globalization, no policy shift. A symbiosis.

That's where your analysis(otherwise excellent and informative, thank you) is incomplete.