Minimum Rage: The remix

[Loren Pechtel]

#158

The Helmetmaker




That was not the motive. Rather, it was a positive one, of pandering to the majority of wage-earners, to those from the middle level downward, and of obsessing on these to the exclusion of those at the lowest levels. It was not to target the lowest levels for exclusion but rather to give benefits to those just above them, and upward to about the middle of the income level, to win their applause and votes and gain popularity.

Neither of you are on target. The original purpose of the minimum wage was to drive out black competition for jobs.

 

[The Helmetmaker]

Neither of you are on target. The original purpose of the minimum wage was to drive out black competition for jobs.

Oh, the eugenicists had their own special hatred of blacks, but that was subsumed under the broader goal of creating a Utopian society, without both "defectives," as they termed them, and blacks, and southern europeans, and others.

 

[AthenaAwakened]

Neither of you are on target. The original purpose of the minimum wage was to drive out black competition for jobs.

Oh, the eugenicists had their own special hatred of blacks, but that was subsumed under the broader goal of creating a Utopian society, without both "defectives," as they termed them, and blacks, and southern europeans, and others.

so Loren

If there were no black people in America, there would be no minimum wage?

 

[SimpleDon]

The minimum wage is a rational response to fulfilling one of the basic functions of the economy, distributing adequate resources to the members of society. In fact, we should do much more than the minimum wage.

Most of the social democracies in Europe negotiate wages for most of the workers in their economies every three years or so. In Germany the lande, approximately the same as the states in the US, meet with trade associations and labor unions to negotiate labor rates for certain key categories of workers, say metal workers. This sets the wage rates for all of the workers in this category in all of the companies in the political division, the land in the case of Germany. This takes the setting of wages out of competitive pressures because all of the companies have to pay the workers the same wage. They can pay more of course.

Many other wages are based on a fixed percentage of a key one like metal workers. Pattern makers might make 15% more for example or plus 25% for tool makers.

When I was working in Germany the decision was made by everyone involved to forgo wage increases above inflation and instead to put the money into incentives for early retirement. This had a number of positive effects. The increase in early retirements lowered the average wages paid by the companies since the older workers were the highest paid. Promotions rippled through the companies creating entry level positions. The promoted workers kept their old salaries resulting in the highest paid being effectively replaced by the lowest paid resulting in the lower average pay for the company as a whole. This improved the competitiveness of the entire economy in foreign trade.

This is impossible to accomplish in the US with the system that we have. Lower wages more often than not result in higher profits, nothing more. This is a result of defining the sole purpose of a corporation as making profits for the shareholders. This is pretty much unique to the Anglo American economies. In most others the interests of the shareholders have to be balanced with those of the employees and the nation as a whole. The largely imbalanced, extreme policies of the Anglo American countries produces imbalanced economies.

The system of industry wide negotiation for wages and benefits has produced other helpful trends including more vacation time and shorter work weeks. Both increase in the employment in the economy.

 

[SimpleDon]

The idea that supply and demand should set the wage rates fails for a number of reasons.

• Individual workers are at a disadvantage negotiating wage rates with large companies.
  
• They are wage takers, not wage barterers.
  
• The idea is that there is a natural value to labor separate from the wage rate. This ridiculous. Please explain this concept without the use of money terms.
  
• If it was even valid the idea of supply and demand setting wages would result in instability in the labor market, high wages in good times and low wages in bad times.
  
• Wages are the primary component of demand. This means that you would be increasing demand in good times and decreasing demand in bad times, the exact oppose of what you want.
  
• The vast majority of prices are set by cost plus pricing, also called administered pricing, not prices set by supply and demand bartering.
  
• Uncertain wage rates and prices, what we would have if they are set by supply and demand, would discourage investment. Just imagine that we have to tell a prospective investor that you don't know what price you will get for the product and you don't know what wages you will have to pay. The net result is that you don't know how much investment you need and you don't know how much profit he will earn. Will he invest in your venture? This is one why the market has chosen more static pricing and more static wages.
  
• Just to empathize the last point, we have static prices and wages instead of prices and wages set by supply and demand not because of government interference in the market but because over the years through a long, slow process of evolutionary growth by trial and error, the market has chosen static pricing and wages. The capitalistic system works better with static prices and wages.
  
• Above all else the economy is a human system. And like in all human systems stability is preferred to instability, certainty is preferred to uncertainty.
  
• Once again, one of the basic functions of the economy is to distribute needed resources to the members of society. This is done best in capitalism by paying wages for work. Having the government supplement low wages by transfer payments is unnecessary complex, inefficient and creates unneeded social friction. And as always the government subsidizing something always results in more of whatever they subsidize. When you subsidize low paying jobs you will end up with more low paying jobs and more money paid out in subsidies.
  
• If you do believe that prices are set by supply and demand then you have to believe that the first order effect of increasing wages would not be increasing prices but decreasing profits. You can't assume that prices are set by supply and demand to support one one argument and then assume that they aren't set by supply and demand to support another argument. It is inconsistent.
  
• If you argue that raising the minimum wage will result in unemployment then you have to address the question of if all increases in wages result in widespread unemployment or if for some reason the minimum wage is the only wage that has this problem.

 

[The Helmetmaker]

SimpleDon

Your opinion about the minimum wage being a rational response, too, ignores historical facts. The minimum wage in America was created by eugenicists to weed out the defectives and undesirables from employment, and thus from proper society. It accomplishes its purpose even today. We have, what, 92 million people marginalized and idling in this country? The minimum wage has already priced these people out of the job market, how does raising it put those people to work?

 

[Loren Pechtel]

The idea that supply and demand should set the wage rates fails for a number of reasons.

• Individual workers are at a disadvantage negotiating wage rates with large companies.

• 
  
  Individuals likely have no power to negotiate lower level wages with any one employer. However, they do have a very powerful tool anyway--their feet. Rather than negotiating with one employer you look at many prospective employers. If one employer isn't offering enough they're going to find themselves with a shortage of workers.
  
  

  [*]If it was even valid the idea of supply and demand setting wages would result in instability in the labor market, high wages in good times and low wages in bad times.

  
  Which is exactly what we see, although moderated by the fact that wages are rarely reduced.
  
  

  [*]Wages are the primary component of demand. This means that you would be increasing demand in good times and decreasing demand in bad times, the exact oppose of what you want.

  
  This is an unfortunate bit of reality that there's no way around. Economics is a feedback cycle.
  
  

  [*]The vast majority of prices are set by cost plus pricing, also called administered pricing, not prices set by supply and demand bartering.

  
  No. Prices are controlled by supply and demand. It's just that if there is excess profit then competitors will show up (unless they are prohibited)--the supply rises, the price drops. This continues until the supply & demand price is the cost plus price. Since this has already happened to most goods you see them at cost plus.
  
  Note that if you hold wages constant in bad times the price per product will rise--still not what you want. The problem is inherent. (In reality this is just another manifestation of the infinite pool of profits fallacy--you want to take the money from that pool.)
  
  

  [*]Uncertain wage rates and prices, what we would have if they are set by supply and demand, would discourage investment. Just imagine that we have to tell a prospective investor that you don't know what price you will get for the product and you don't know what wages you will have to pay. The net result is that you don't know how much investment you need and you don't know how much profit he will earn. Will he invest in your venture? This is one why the market has chosen more static pricing and more static wages.

  
  So you want a command economy? They fare even worse.

 

[SimpleDon]

Individuals likely have no power to negotiate lower level wages with any one employer. However, they do have a very powerful tool anyway--their feet. Rather than negotiating with one employer you look at many prospective employers. If one employer isn't offering enough they're going to find themselves with a shortage of workers.

[*]If it was even valid the idea of supply and demand setting wages would result in instability in the labor market, high wages in good times and low wages in bad times.

Which is exactly what we see, although moderated by the fact that wages are rarely reduced.

[*]Wages are the primary component of demand. This means that you would be increasing demand in good times and decreasing demand in bad times, the exact oppose of what you want.

This is an unfortunate bit of reality that there's no way around. Economics is a feedback cycle.

[*]The vast majority of prices are set by cost plus pricing, also called administered pricing, not prices set by supply and demand bartering.

No. Prices are controlled by supply and demand. It's just that if there is excess profit then competitors will show up (unless they are prohibited)--the supply rises, the price drops. This continues until the supply & demand price is the cost plus price. Since this has already happened to most goods you see them at cost plus.

Note that if you hold wages constant in bad times the price per product will rise--still not what you want. The problem is inherent. (In reality this is just another manifestation of the infinite pool of profits fallacy--you want to take the money from that pool.)

[*]Uncertain wage rates and prices, what we would have if they are set by supply and demand, would discourage investment. Just imagine that we have to tell a prospective investor that you don't know what price you will get for the product and you don't know what wages you will have to pay. The net result is that you don't know how much investment you need and you don't know how much profit he will earn. Will he invest in your venture? This is one why the market has chosen more static pricing and more static wages.

So you want a command economy? They fare even worse.

I am not saying that we need a command economy. I am describing the economy that we have. The economy that we have has chosen sticky prices and wages instead of the instability of supply and demand set prices and wages. In fact I clearly stated that the government didn't impose sticky prices and wages, that the market chose.

Do you intentionally edit my posts to just the parts that you think that you can make an argument against? Or do you do it because you don't understand the pieces that you edit out? Or that you think that you can't make my arguments say something that they don't because you don't have any arguments against what I really said, like here.

I don't advocate in anyway a command economy. You are correct, they don't work well. But neither do I advocate making our current economic system into something that it can never be or pretending that it is currently something that it isn’t. Our current economy has only the very remotest contact with supply and demand setting prices or wages. Over 70% of the prices in the economy are set by cost plus pricing, not set by supply and demand. In the short term supply and demand doesn't impact prices at all. And there is minimum impact over the long term. The economy doesn't respond to long term influences hardly at all. That is what Keynes meant when he said that in the long term we are all dead.

The fantasy of the free market depends on too many unrealistic conditions to occur to accommodate supply and demand to set prices. Your statement,

No. Prices are controlled by supply and demand. It's just that if there is excess profit then competitors will show up (unless they are prohibited)--the supply rises, the price drops. This continues until the supply & demand price is the cost plus price.

Illustrates the problem quite well. If there is excess profits competitors will show up if and only they can justify the investment to get into the business. And if they are stupid enough to not realize that the people who are already in the business making excess profits will be the ones to best be able to survive the price drop that will occur when they increase the supply. The fantasy economics requires that the costs of entering a business is low, something that is true for very few businesses in the real economy.

And this statement confirms the level of confusion that you have.

Since this has already happened to most goods you see them at cost plus.

No, we see most prices at cost plus because that is how they are set. Supply and demand setting prices specifically excludes cost plus pricing and severely limits profits. The fantasy economics tells us that supply and demand should drive prices down to the marginal cost of production of the last item that the factory can produce. How many factories do you know where they are working night and day to produce products that they are going to sell for no profit? Do you run your business like this? Do you know anyone who runs their business like this?

It depends on the rather dubious proposition that in the vast majority of businesses the economies of scale are more than canceled out eventually by the law of diminishing returns. That the costs increase dramatically for extra production at some point. This may have been somewhat true for the largely artisan and agrarian economy that existed when this theory was advanced in the early 19th century but it hardly applies to an industrial economy. The entire theory of supply and demand setting prices depends on this so-called "U" shaped marginal costs of production. Without it the theory collapses. And yet virtually the entire rational for the industrial revolution is to avoid that "U" shaped marginal cost of production, to avoid the law of diminishing returns, to be able to produce product ever cheaper by producing more of it.

Don't you understand the basic theory behind the economics that you champion here everyday? I don't think that you do. Prove me wrong, list the economic theories that you feel supports the free market with supply and demand setting prices.

It is a total house of cards. The "U" shaped marginal costs of production is just one example of the ridiculous theories advanced to support the fantasy economics of the free market. I am pretty sure that I know all of them and can debunk all of them. Test me, prove me wrong.

Your deflection into claiming that I am advocating a command economy, which as I said I am not, neatly avoided you having to address the point that I made, that the real economy that we have today has freely chosen to have sticky* prices and sticky* wages because they work better. That the instability that comes from prices and wages being set by supply and demand makes investment decisions harder. That human beings prefer stability and continuity, especially in business. Please address it now.

* The word "sticky" is more descriptive than the word "static" that I used in the original post. I am not a New Keynesian and it took me awhile to remember the word. [/Obscure economics joke]

And no, most people can't walk off of their jobs if they don't get an adequate raise. They are not free to change jobs because of factors that don't enter directly into the question of supply and demand setting wages. Most are not free to move to a different place for example. Many are trapped by having to keep the health care insurance that they have for example. It is not reasonable to require these things of people to simply get a reasonable wage. Remember that the most basic function of the economy is to distribute resources to the members of society. We do this by paying wages for work.

I know a lot of the valid fallacies concerning the economy. I have never come across the fallacy of the infinite profit pool. I can't imagine anyone advancing it. I can only assume that it is your attempt at humor to imply that I believe that there is an infinite pool of profits to tap in this case for wages. I assure you that I don't believe any such thing.

But neither do I accept the idea that capital, money, is a precious, scarce resource that must be highly rewarded for the economy to work well, another one of the underlying theories required to support the fantasy of the free market. Money is not scarce in a modern economy that uses a fiat money system. Why must we pretend that it is? It only ties us tighter to the people who have money. To give them an importance that they don't deserve.

Money in a modern economy is nothing more than an abstraction in the macroeconomy, a device to get people to work and to give people the incentive to build production facilities. It should only be judged by how well it does these two things. You have seen me say this many times, the real wealth of a nation is in its natural resources, in its ability to produce and in the human capital that it has. Nothing more. The amount of money that it has or that the population has is not real wealth. The simple fact that any sovereign nation can produce any amount of money that it wants by simply typing numbers into the correct computer should tell you this, money is not real wealth to the macroeconomy.

Sorry, I drifted again.

To the overall economy, the macroeconomy, profits and wages are mutually exclusive, money that goes to profits is taken from wages. Money that goes to wages comes from profits. This is widely accepted, it is the basis of so-called supply side economics for example.

Extending that wages are the primary component of demand in the economy, profits are the main component of money available for investment, called supply. It follows that if the economy has too much supply and not enough demand that what is needed is for wages to increase and for profits to decrease. That is the condition that we have now, too much supply and not enough demand.

It doesn't require a command economy to correct this. In fact we are in this condition because of the policies of the previously mentioned supply side economics which were nothing more than policies designed to increase supply, to increase profits by decreasing demand, wages. We simply need to slowly start to reverse these policies. No command economy, unless you consider supply side economics, also called Reaganomics, to constitute a command economy. Then I am afraid that you are just slinging words without paying any attention to their meaning, much as you did to avoid having to address my points.

Your other points, the condensed version.

[*]Wages are the primary component of demand. This means that you would be increasing demand in good times and decreasing demand in bad times, the exact oppose of what you want.

This is an unfortunate bit of reality that there's no way around. Economics is a feedback cycle.

This is nothing more than saying that we have to live with the instability in the economy. Why? The reality is that we can do things to stabilize the econom. The economy adapted to stabilize itself by adopting sticky prices and sticky wages.

In fact I believe that our capitalistic economy is capable of not only being stabilized but that our experience with it has shown it to be very robust and capable of being manipulated to produce much better outcomes than we currently see. It is the fantasy economics of the free market that seems to believe that the economy is a delicate, precious flower that can't be touched for fear of crushing it. A view that can most easily proven false by looking at all of the different forms capitalism takes around the world. All without resorting to a command economy. [/Okay, not so condensed]

[*]If it was even valid the idea of supply and demand setting wages would result in instability in the labor market, high wages in good times and low wages in bad times.

Which is exactly what we see, although moderated by the fact that wages are rarely reduced.

Yes, wages are sticky. By choice.

I think that that is all.

 

[SimpleDon]

SimpleDon

Your opinion about the minimum wage being a rational response, too, ignores historical facts. The minimum wage in America was created by eugenicists to weed out the defectives and undesirables from employment, and thus from proper society. It accomplishes its purpose even today. We have, what, 92 million people marginalized and idling in this country? The minimum wage has already priced these people out of the job market, how does raising it put those people to work?

The one of the main reasons that the entire nation was created to preserve slavery. Does that mean that we must abandon the country because the reason that it was formed was a vile one? Besides minimum wages are pretty popular in the whole world. Are you saying that all of them where written by evil bad eugenicists? A bold assertion.

Equaled by the bold assertion that 92 million people are priced out of the labor market by the minimum wage. I can't wait to see your support for that. Also it means that you have to answer my challenge question, if the minimum wage causes widespread massive unemployment does all other wage increases also cause massive unemployment or is the minimum wage just special?

I assume that that was the only disagreements that you had with my points?

 

[Loren Pechtel]

I don't advocate in anyway a command economy. You are correct, they don't work well. But neither do I advocate making our current economic system into something that it can never be or pretending that it is currently something that it isn’t. Our current economy has only the very remotest contact with supply and demand setting prices or wages. Over 70% of the prices in the economy are set by cost plus pricing, not set by supply and demand. In the short term supply and demand doesn't impact prices at all. And there is minimum impact over the long term. The economy doesn't respond to long term influences hardly at all. That is what Keynes meant when he said that in the long term we are all dead.

The fantasy of the free market depends on too many unrealistic conditions to occur to accommodate supply and demand to set prices. Your statement,

There really are only two choices--command or free market. You admit command doesn't work yet you don't want free market--which means you want command.

No. Prices are controlled by supply and demand. It's just that if there is excess profit then competitors will show up (unless they are prohibited)--the supply rises, the price drops. This continues until the supply & demand price is the cost plus price.

Illustrates the problem quite well. If there is excess profits competitors will show up if and only they can justify the investment to get into the business. And if they are stupid enough to not realize that the people who are already in the business making excess profits will be the ones to best be able to survive the price drop that will occur when they increase the supply. The fantasy economics requires that the costs of entering a business is low, something that is true for very few businesses in the real economy.

The cost of entry only effects how long it takes competitors to show up. They still show up.

Furthermore, since you claim most of the market is set on cost plus I don't see what you're objecting to. Cost plus is as low as it can go. What do you want, business to operate at a loss???

And this statement confirms the level of confusion that you have.

Since this has already happened to most goods you see them at cost plus.

No, we see most prices at cost plus because that is how they are set. Supply and demand setting prices specifically excludes cost plus pricing and severely limits profits. The fantasy economics tells us that supply and demand should drive prices down to the marginal cost of production of the last item that the factory can produce. How many factories do you know where they are working night and day to produce products that they are going to sell for no profit? Do you run your business like this? Do you know anyone who runs their business like this?

Cost plus acts as a floor through which supply and demand can't drive prices for any sustained period of time--when the market price is cost plus nobody is going to invest in more production. (Which can have some very nasty effects when the price is artificially held to cost plus--witness the repeated drug shortages of things that are mostly bought by the government.)

And no, most people can't walk off of their jobs if they don't get an adequate raise. They are not free to change jobs because of factors that don't enter directly into the question of supply and demand setting wages. Most are not free to move to a different place for example. Many are trapped by having to keep the health care insurance that they have for example. It is not reasonable to require these things of people to simply get a reasonable wage. Remember that the most basic function of the economy is to distribute resources to the members of society. We do this by paying wages for work.

A new job normally comes with health insurance. And nobody's saying to walk off the job--you can job hunt while you're employed.

I know a lot of the valid fallacies concerning the economy. I have never come across the fallacy of the infinite profit pool. I can't imagine anyone advancing it. I can only assume that it is your attempt at humor to imply that I believe that there is an infinite pool of profits to tap in this case for wages. I assure you that I don't believe any such thing.

It's my name for the assumption I see again and again from the left that you can fund anything worthwhile by taking the money from excess profit being made by companies. Since a discussion of whether the money is there is never acceptable that means the excess profit must be infinite. It comes in a million guises but they're all basically the same underneath.

But neither do I accept the idea that capital, money, is a precious, scarce resource that must be highly rewarded for the economy to work well, another one of the underlying theories required to support the fantasy of the free market. Money is not scarce in a modern economy that uses a fiat money system. Why must we pretend that it is? It only ties us tighter to the people who have money. To give them an importance that they don't deserve.

Thus showing that you don't understand what money is.

Money in a modern economy is nothing more than an abstraction in the macroeconomy, a device to get people to work and to give people the incentive to build production facilities. It should only be judged by how well it does these two things. You have seen me say this many times, the real wealth of a nation is in its natural resources, in its ability to produce and in the human capital that it has. Nothing more. The amount of money that it has or that the population has is not real wealth. The simple fact that any sovereign nation can produce any amount of money that it wants by simply typing numbers into the correct computer should tell you this, money is not real wealth to the macroeconomy.

Yes--and money is the yardstick by which these are measured. While you can increase the money supply that simply causes inflation, it produces no more real wealth to do things with and thus doesn't let you accomplish anything more.

Extending that wages are the primary component of demand in the economy, profits are the main component of money available for investment, called supply. It follows that if the economy has too much supply and not enough demand that what is needed is for wages to increase and for profits to decrease. That is the condition that we have now, too much supply and not enough demand.

No. What's needed is to increase the velocity of money. That's what a recession/depression is: slow money.

It doesn't require a command economy to correct this. In fact we are in this condition because of the policies of the previously mentioned supply side economics which were nothing more than policies designed to increase supply, to increase profits by decreasing demand, wages. We simply need to slowly start to reverse these policies. No command economy, unless you consider supply side economics, also called Reaganomics, to constitute a command economy. Then I am afraid that you are just slinging words without paying any attention to their meaning, much as you did to avoid having to address my points.

Supply side had nothing to do with it. The economy crashed because people were living on borrowed money. Of course the market finally corrected.

Your other points, the condensed version.

[*]Wages are the primary component of demand. This means that you would be increasing demand in good times and decreasing demand in bad times, the exact oppose of what you want.

This is an unfortunate bit of reality that there's no way around. Economics is a feedback cycle.

This is nothing more than saying that we have to live with the instability in the economy. Why? The reality is that we can do things to stabilize the econom. The economy adapted to stabilize itself by adopting sticky prices and sticky wages.

You're ascribing intent where there was none.

Furthermore, we *DO* try to stabilize the economy--look at the inflation rate pre-Fed and in the era of the Fed. Things have been a lot smoother since. There's a limit to how much they can accomplish, though.

In fact I believe that our capitalistic economy is capable of not only being stabilized but that our experience with it has shown it to be very robust and capable of being manipulated to produce much better outcomes than we currently see. It is the fantasy economics of the free market that seems to believe that the economy is a delicate, precious flower that can't be touched for fear of crushing it. A view that can most easily proven false by looking at all of the different forms capitalism takes around the world. All without resorting to a command economy. [/Okay, not so condensed]

And where are you finding these places that did it better? Remember, you can't count places that we are propping up in one way or another. (And every place with an economy on a par with ours does so under our military umbrella.)

 

[Togo]

First off, let's get rid of this lot:

You mean it's not a perfect utopian competitive free market?

You obviously imagine that...

One could argue, e.g., that prices are set by the cost of production.

But that is not correct...

From your mistake above, thinking that supply-and-demand means that...

So your argument in favor of minimum wage boils down to this:...

Your objection to low wages is totally determined by your...


And this is your fundamental argument for...

Let's have a little less of this, ok?

#152

Togo

A "fair rate" is the market rate, based on supply-and-demand. Just like the "fair" price for a loaf of bread is the market price, set by supply-and-demand.

This price is "fair" because it is best for consumers. It ensures that the price or wage is high enough in order to get the production done, for the consumer's benefit, but no higher than the minimum necessary to accomplish this production.

I don't agree. Do you have any evidence for this (ideological?) assertion?

You mean the price for a loaf of bread at the store is not the best price for consumers? You would have all products be priced by a different mechanism? What pricing mechanism would be better for consumers?

How about the one we have now?

Right, the current pricing mechanism is the right one, for the reason I just gave above. It's based on supply-and-demand,

Only very loosely.

What about the current market is not based on supply-and-demand?

See my previous post.

...anything else that affects prices is an aberration and a distortion which makes the market worse and makes buyers and sellers worse off.

That's an ideological position, not a fact.

Consider two bakeries. The first is the price-efficient bakery. It produces the most popular type of bread at the very lowest price it can. Its staff aren't very well trained - they don't know much about bread because they don't need to, and they're often tired and sick. They work while sick, unless they literally can't stand, because they're on a zero-hours contract and only get paid for the hours they work.

The second is an actual bakery. There you'll see a vast array of different types of bread, at an impressive variation of prices. What we're seeing is a business producing a range of products that compete with each other. The staff are alert, helpful, and well-motivated. Obviously all this costs, and the most popular types of bread are 10% more expensive than at the efficiency store.

Why do you suppose that the second type of bakery is more common, attracts more business, and makes more money? Could it be customers select on something other than price?

In both cases it is supply-and-demand alone which is setting the prices. You haven't named any factor at work that is not a part of the supply-and-demand factors setting the prices of the bread in each case.

You need to learn what "supply-and-demand" really means.

In that case there is a basic logical flaw in your arguement.

You previously argued that because the market worked by supply and demand, wages should always fall to the lowest level necessary to produce the product. But here you are arguing that supply and demand does not always reduce prices to the lowest level. So which is it?

Yes, you can try and claim that everything that ever effects the market is somehow an aspect of supply and demand, but then you can't go onto to claim anything based on that. All you've done is re-labelled 'everything' as supply and demand, so a claim based on that is meaningless. Or you can keep to a narrow definition of supply and demand, in which case it becomes valid to make claims based off it, but the arguement still fails, this time on the facts, because prices aren't, in practice, based on supply and demand.

Either your claim is meaningless, or it's wrong. Either invalid, or false.

What else is taken into account for setting prices than the principle of supply-and-demand?

Well, just off the top of my head, brand, firm image, market segmentation, lifestyle affliation, Ease of acquisition/ease of use, additional features, associative buying, variety/standardisation, regulatory factors, tax implications, familiarity, market sentiment, and so on.

Every one of those is a part of supply-and-demand.

Great, so a regulation setting a minimum wage is supply and demand?

Again, there's nothing stopping you calling everything that effects price as supply and demand, simply because it effects price. But that's a circular arguement. Supply and demand defined that way can not support the claims you are making of it.

If that's all you mean, then you have not proved that we are "hurt" by being allowed to make choices.

Perhaps in some cases a wider range of choices can mean higher prices.

But the wider range of choices is what the consumers want, in that case, and they are willing to pay the higher prices in return for that extra choice.

So they can't choose to have a minimum wage?

Apparently they do. They object to minimum wage because it denies employers and employees freedom to choose the wage level.

They support all free choice, including the choice to buy something more expensive.

Do they support the freedom to set hygiene levels? What about the freedom to sell counterfeit goods, or buy with counterfeit currency? Do they support the freedom to ignore safety standards, mug people in the street, or enslave others?

They support all freedoms, or free choice, for anything that does not infringe on someone else's free choice or constitute an act of violence or deprivation toward those other than the buyer and seller.

None of the examples I gave involve violence or deprivation to anyone other than the buyer or seller.

Poor hygiene, only effects buyer.
Confiet goods, only effects buyer
Ignore safety standards, only effects buyer
Counterfiet money, only effect seller
Enslave workers, only effects seller (of labour)
Mug people in the street, might effect others. Does that mean you're ok with it as long as it's only the buyer who gets mugged?

Or are you starting to see that infringing the freedom of buyer and seller to set terms is not only desirable, but necessary to the conduct of a free market?

And this includes freedom from fraud. To say they favor "freedom" obviously does not mean freedom to commit crimes,

That's not obvious at all. You wouldn't support minimum wage merely if it became a criminal offence not to pay it, would you?

There is a huge difference, e.g., between a transaction which pollutes the air, which does interfere with the lives of others than just the buyer and seller, and a transaction where cheap labor is hired. The latter impacts on no one other than the particular buyer(s) and seller(s) involved in the transaction, including the employer(s) and employee(s), as long as they are making their choices freely. No one outside this transaction, other than buyer(s) and seller(s), is impacted, and so it does not do any net damage to the world,

so it doesn't drive down the price of labour and reduce the spending power of the workforce?

All of these make products more expensive, and thus, by your argument, hurt us all.

Those who favor free choice do not mean free choice to commit crimes etc. This should be obvious,

It should be, but you seem to be struggling to draw a distinction between what should be banned by law, and what should not. You want some things to be banned, and others not, but can't give me the distinction between them. The best you've tried is something that effects noone else. A doctor who gets paid in advance and then simply kills his patients doesn't effect anyone other than the buyer and the seller, so that clearly doesn't work.

What's missing is that the buyer or seller must be protected from certain kinds of transaction -ones which cause harm - irrespective of whether they freely entered into them or not.

However, there is fraud in some promotions of these and other products. The terms "organic" and "fair trade" are not clearly defined, and some consumers are defrauded into believing there is something superior in a product labelled as "organic" or "fair trade," when the product is not really superior at all, and there is nothing wrong with investigating promotional claims or advertising that misuse these terms in a way as to defraud consumers.

How does fradulent advertising effect anyone other than the buyer or seller?

The benefits of "consumer choice" do not apply in those cases where the choices are a response to fraudulent claims for the products they are choosing.

So there are situations in which a choice isn't really a choice? Such as one made under duress, or via false information?

Can you see how that leads to a minimum wage, or shall I spell it out for you?

So you're arguing that the freedom to call your product whatever you want and express your opinion about its merits, should be limited to those claims that aren't fraudulent or misleading, because that's not a true expression of consumer choice, and thus denies the benefits that usually come from consumer choice?

Great. So that's consumers, what about producers/suppliers? Presumably they should also be protected from fraud, robbery, or market fixing from their customers, or else you don't get a functioning market there either.

There can be such a thing as fraud by consumers. In general there is no need to police consumers, however, or impose laws, other than against shoplifting or something of that nature.

If you think there is fraud on a grander scale being committed by consumers, then you need to give an example.

I said customers, not consumers. A manufacturer will buy a lot as a customer, and may enjoy a great deal of power over their suppliers.

Can you see how there isn't a truly free choice going on there . . .

But there IS truly a free choice. Both of the parties, employer and employee, are made better off by the transaction, because either is free to say no if it's not in their interest.

What makes you think they are free to say no?

That may not be the case in the case of desperation wages. It certainly isn't the case where workers are forced to accept a job if offered one. And it ignores the costs of moving from one job to another, which may be insurrmountable.

Who is made worse off? The workers won't choose to take that job if it makes them worse off, so it can't be the workers who are worse off. So who's made worse off by the payment to the workers going down below some minimum-wage level?

Workers who's choices are restricted in some way. As is typically the case.

- - - Updated - - -

There really are only two choices--command or free market. You admit command doesn't work yet you don't want free market--which means you want command.

Oh, come on. Fallacy of the excluded middle. You know better, Loren.

 

[Loren Pechtel]

There really are only two choices--command or free market. You admit command doesn't work yet you don't want free market--which means you want command.

Oh, come on. Fallacy of the excluded middle. You know better, Loren.

So you're saying adding some command components makes it better?

In the real world command always gets it wrong.

 

[bilby]

There really are only two choices--command or free market. You admit command doesn't work yet you don't want free market--which means you want command.

Oh, come on. Fallacy of the excluded middle. You know better, Loren.

So you're saying adding some command components makes it better?

In the real world command always gets it wrong.

Almost all manufacturing these days is managed as a command structure.

The parts are sent to the production line at times, and in quantities, determined by a planner sitting in an office; he decides what subassemblies to make, what final products to make, when, and in what amounts, in order to ensure that the wholesale store has sufficient of each SKU to meet anticipated demand.

Attempts have been made to set up kanban systems that pass information through the system without central control, and these can work well for materials supply to the factory; but still a planner is needed to manage finished goods inventories, and decide what to make and when.

Money is a sort of universal kanban. It does a better job of managing non-human resources than any previous attempt at a command economy has been able to achieve - but still we need governments to do planning at the infrastructural level.

The failures of the command economies of the 20th century were largely failures of communication and modelling. No one has tried to make a command economy work with modern computers and communications infrastructure. To say that they cannot ever work based on past attempts is premature.

 

[SimpleDon]

I going to split this up. It is getting too long.

There really are only two choices--command or free market. You admit command doesn't work yet you don't want free market--which means you want command.

How absolutionist of you. Tell me, which do we have now, an absolute free market or an absolute command market?

I would say that we have something in between, but I am not an absolutionist like you.

No. Prices are controlled by supply and demand. It's just that if there is excess profit then competitors will show up (unless they are prohibited)--the supply rises, the price drops. This continues until the supply & demand price is the cost plus price.

Illustrates the problem quite well. If there is excess profits competitors will show up if and only they can justify the investment to get into the business. And if they are stupid enough to not realize that the people who are already in the business making excess profits will be the ones to best be able to survive the price drop that will occur when they increase the supply. The fantasy economics requires that the costs of entering a business is low, something that is true for very few businesses in the real economy.

The cost of entry only effects how long it takes competitors to show up. They still show up.

You believe that the more it cost to enter a market the longer it will take competitors to enter the market but they will enter it? This raises a large number of questions.

If it takes long enough, say a decade or more what are the chances that economic conditions have changed? Even if it only takes years is there a chance that economic conditions will have changed? An excess profit might have been turned into a loss.

For the duration of the time that it takes competitors to enter the market obviously the market will be dominated by administered pricing, not prices set by supply and demand, correct?

So on average the industries that cost the most to by in are the ones where there will be the greatest amount of administered pricing and the least amount of pricing set by supply and demand, correct?

So, next question is simple, over the last two hundred years have the economies of the world demonstrated a tendency to more capital required to get into a business or less investment required to get into a business?

I believe that it now costs a lot more to get into a particular business than it use to, meaning that by your logic, fewer and fewer prices are now set by supply and demand.

Furthermore, since you claim most of the market is set on cost plus I don't see what you're objecting to. Cost plus is as low as it can go. What do you want, business to operate at a loss???

No, supply and demand setting prices can force prices quite a bit below cost, forcing sales at a loss. In fact, the entire theory of the free market setting prices by supply and demand requires it. This is one of the more absurd ideas that one must adopt in order to accept the free market setting prices by supply and demand.

It is a sign of your confusion that you are now assuming my arguments against pricing being set by supply and demand. It is not me who is demanding that businesses manufacture product and to sell it at a loss. It is you, whether you realize it or not, which apparently you don't. Join me below the next quote and I will try, once again, to explain.

And this statement confirms the level of confusion that you have.

Since this has already happened to most goods you see them at cost plus.

No, we see most prices at cost plus because that is how they are set. Supply and demand setting prices specifically excludes cost plus pricing and severely limits profits. The fantasy economics tells us that supply and demand should drive prices down to the marginal cost of production of the last item that the factory can produce. How many factories do you know where they are working night and day to produce products that they are going to sell for no profit? Do you run your business like this? Do you know anyone who runs their business like this?

Cost plus acts as a floor through which supply and demand can't drive prices for any sustained period of time--when the market price is cost plus nobody is going to invest in more production. (Which can have some very nasty effects when the price is artificially held to cost plus--witness the repeated drug shortages of things that are mostly bought by the government.)

Once again, you are injecting the element of time, which neoclassical economics doesn't consider in its theoretical support of the free market setting prices by supply and demand. This means that there is hope for you.

As you learned above it is one of arguments against the theory of the free market setting prices by supply and demand. If it takes long enough for supply and demand to take control of prices it is vitally the same as if they never take hold at all. Because over time business conditions will change to cancel out the excess profit. More importantly businesses who might enter a profitable business will realize this and will be less likely to enter the new business if the time that it takes is too long or the investment too great to take the risk. Especially since they are allowed to read these blogs and you kind of spilled the beans already that the net result of more supply is lower prices increasing the risk.

We didn't even talk about the flip side of the coin, the theory of price setting by supply and demand requires not just a low cost of entry into a business but also a low cost of exit from a business, that is the ability to recover the initial investment pretty much intact if profits drop into losses. Does that describe the current situation to you?

Once again you have edited out some of my brilliant, but apparently, elusive prose. This time it was concerning the diminishing returns of marginal productivity.

I accept that it is me who is advancing the heterodox position, the challenge to the prevailing orthodoxy. It is unfair of me to ask you for your understanding of something that I understand all too well. And that it is me who must present my ideas in a way that you can understand. And that I must do it in a way that presumes the least amount of knowledge of neoclassical economics on your part. So forgive me if I go too far in the other direction. I am not intentionally insulting your knowledge of these things. I am trying to establish common ground on which to present my arguments.

The idea of diminishing marginal productivity is at the very core of neoclassical economics. It is included in everything. But nothing in the neoclassical economics set of theories is as dependent on it as the idea of supply and demand setting prices and wages. Since this is a thread about the minimum wage I will switch gears ever so slightly and talk about supply and demand setting wages. But be aware that the same holds for prices.

The idea of diminishing marginal productivity is the idea that at some point the amount of product produced by adding a unit of resources will start to diminish. In other words hiring additional workers will increase the production by a set amount for each new hire up to a certain number. After that the amount of increased production from each new hire will decrease. In fact, the extra production from each new hire will be less than the extra production from the next to last new hire.

The net result is that the number of workers that the firm is willing to hire depends on the going rate of the wage for the workers hired. It makes no sense to hire someone for $10 an hour if they only increase production by $9.50 an hour. That a company to maximize profit will keep hiring $10 an hour workers until the last hire's added product is $10 an hour at which point they will stop hiring. This added product is called the marginal product in econospeak, and it is called the law of diminishing marginal productivity as a result. Most of the time it is just referred to as marginal productivity or even marginal production or marginal product. It is a way for economists to make a simple idea obscure, so that only economists understand it.

It is this argument that is applied against the minimum wage, that if the wage is increased then some of the existing workers have to be laid off because the wage has been pushed above the marginal productivity of those last workers hired. It is this behind the often repeated phrase that "when the price of something goes up people buy less of it." It is not because the price went up by the theory, but that the cost, the wage, went up because of some non-market force, the law increasing the minimum wage in our case, and forced the layoff of X number of workers because the wage is now above the marginal productivity of the last X number of workers hired.

And what does this have to do with the setting of prices and wages by supply and demand? Because in spite of your protests to the contrary, the theory of the free market doesn't allow cost plus pricing or cost plus pricing to set a floor for the prices set by supply and demand. But it isn't your failing, it is a indication that something is wrong with the neoclassical theory of prices and wages set by supply and demand. There is no allowance in the theory for cost plus pricing. The theory is that supply and demand set the prices and the wages, period. And yet you realize based on your own experience that in the real world most prices are cost plus and producers can't operate for long at a loss. Neither are taken into account in the theories supporting the free market setting prices and wages by supply and demand.

Back to marginal productivity. You probably know enough to realize that this concept is wrong too. In fact, the question of whether such marginal products exist in the real world is solely an empirical question. And the empirical answer is no, they generally don't exist. Studies of actual manufacturing industries are unanimous in finding that worker productivity is constant for the personnel hired. That it is not diminished for the last employees hired as marginal productivity says. And you probably already knew this.

But see what this does to the argument against the minimum wage. If the productivity of the workers employed is the same then it would be stupid for the owner to lay off workers when the wage is forced up. The owner by doing so would not only be giving up the profit lost to the increase in the wages, they also would be giving up the profits from the additional units that the laid off workers would have produced. The best option would be to continue to produce the number of units that they can sell, just like before the wage increase and to just accept the lower profits on each unit sold due to the increased wages. Any other option results in less overall profit. There is no reason for the owners to buy less labor because the price goes up.

In fairness to neoclassical economists I have to tell you that they have known about the flaws in marginal productivity since pretty much about the time that it was proposed a couple of hundred years ago or so. But it keeps popping up because it is taught in introductory economics courses, the ubiquitous "Econ 101" that we are always hearing about. Neoclassical economists in fact explain the problem with the minimum wage using a more sophisticated and equally wrong theory involving the trade off between labor costs and capital investment. You have read a version of it here simplified as "if you raise the minimum wage more jobs will be lost to automation."

This theory has also been throughly investigated both theoretically and empirically and has been proven to be every bit as wrong as marginal productivity. If you can bear the pain Google "Cambridge Capital Controversy." The net result of it was that Paul Samuelson admitted that the neoclassical capital theory had been completely "debunked," a completely delightful word, leaving heterodox economists everywhere to use the verb "debunking" when exposing the frailties of modern neoclassical economic theories, which is quite often.

There is hardly a supporting theory for the self-regulating, self-organizing free market with wages and prices set by supply and demand that hasn't been thoroughly debunked. I don't know of any. And yet the idea of the "free market" lives on, the Emperor without any clothes, refusing to die the death that it so richly deserves.

And no, I haven't turned the neoclassical economics theories into cartoonish strawmen to make them easier to tear down. They really are that cartoonish on their own.

And no, we are not talking about the productivity of individuals. If X number of employees produced Y number of products and they were sold to produce the maximum amount of profit before the wage goes up, after the wage goes up the same number of employees X will still produce Y products that can be sold to produce the maximum amount of profit, it will just be less profit than before.

I will get to the rest of your post later. The above has taken hours for me to get through.

 

[Loren Pechtel]

You believe that the more it cost to enter a market the longer it will take competitors to enter the market but they will enter it? This raises a large number of questions.

If it takes long enough, say a decade or more what are the chances that economic conditions have changed? Even if it only takes years is there a chance that economic conditions will have changed? An excess profit might have been turned into a loss.

Investment is always balanced by risk. The riskier something is the more expected profit is needed before investment occurs.

For the duration of the time that it takes competitors to enter the market obviously the market will be dominated by administered pricing, not prices set by supply and demand, correct?

Unless you have a monopoly you have competition.

So, next question is simple, over the last two hundred years have the economies of the world demonstrated a tendency to more capital required to get into a business or less investment required to get into a business?

I believe that it now costs a lot more to get into a particular business than it use to, meaning that by your logic, fewer and fewer prices are now set by supply and demand.

In general it costs more--but there's also more money around. Furthermore, supply and demand operates (albeit not at it's best) even with only two players.

Furthermore, since you claim most of the market is set on cost plus I don't see what you're objecting to. Cost plus is as low as it can go. What do you want, business to operate at a loss???

No, supply and demand setting prices can force prices quite a bit below cost, forcing sales at a loss. In fact, the entire theory of the free market setting prices by supply and demand requires it. This is one of the more absurd ideas that one must adopt in order to accept the free market setting prices by supply and demand.

Nobody sells at below their marginal rate unless either attempting to manipulate the market or because they're compelled at gunpoint. You do get cases where a company is screwed by fixed costs and sells below their total cost because that's not as bad as sitting idle would be.

As you learned above it is one of arguments against the theory of the free market setting prices by supply and demand. If it takes long enough for supply and demand to take control of prices it is vitally the same as if they never take hold at all. Because over time business conditions will change to cancel out the excess profit. More importantly businesses who might enter a profitable business will realize this and will be less likely to enter the new business if the time that it takes is too long or the investment too great to take the risk. Especially since they are allowed to read these blogs and you kind of spilled the beans already that the net result of more supply is lower prices increasing the risk.

No, the effect is usually pretty quick once there is competition.

We didn't even talk about the flip side of the coin, the theory of price setting by supply and demand requires not just a low cost of entry into a business but also a low cost of exit from a business, that is the ability to recover the initial investment pretty much intact if profits drop into losses. Does that describe the current situation to you?

It's because of these costs that the effect isn't nearly instant.

The idea of diminishing marginal productivity is the idea that at some point the amount of product produced by adding a unit of resources will start to diminish. In other words hiring additional workers will increase the production by a set amount for each new hire up to a certain number. After that the amount of increased production from each new hire will decrease. In fact, the extra production from each new hire will be less than the extra production from the next to last new hire.

The net result is that the number of workers that the firm is willing to hire depends on the going rate of the wage for the workers hired. It makes no sense to hire someone for $10 an hour if they only increase production by $9.50 an hour. That a company to maximize profit will keep hiring $10 an hour workers until the last hire's added product is $10 an hour at which point they will stop hiring. This added product is called the marginal product in econospeak, and it is called the law of diminishing marginal productivity as a result. Most of the time it is just referred to as marginal productivity or even marginal production or marginal product. It is a way for economists to make a simple idea obscure, so that only economists understand it.

The reality is that it's a balance between workers and capital. Too many workers for the capital and productivity drops. They can boost the productivity per worker by adding more equipment. (And this is why things which destroy capital are a bad thing--they alter this ratio.)

But see what this does to the argument against the minimum wage. If the productivity of the workers employed is the same then it would be stupid for the owner to lay off workers when the wage is forced up. The owner by doing so would not only be giving up the profit lost to the increase in the wages, they also would be giving up the profits from the additional units that the laid off workers would have produced. The best option would be to continue to produce the number of units that they can sell, just like before the wage increase and to just accept the lower profits on each unit sold due to the increased wages. Any other option results in less overall profit. There is no reason for the owners to buy less labor because the price goes up.

Once against the infinite pool of profits fallacy strikes.

Profit margins are usually pretty low. A minimum wage increase could easily drive them below zero. Furthermore, even if that doesn't happen you'll get a market with too low a profit margin, as competitors fail or leave they won't be replaced.

 

[DBT]

I'd like to see figures in relation to the remark ''Profit margins are usually pretty low''

How low are the profit margins for an average business?
What is the expenditure of an average business in wages?
What ratios are we looking at?

 

[Togo]

There really are only two choices--command or free market. You admit command doesn't work yet you don't want free market--which means you want command.

Oh, come on. Fallacy of the excluded middle. You know better, Loren.

So you're saying adding some command components makes it better?

No, that would be embracing your fallacy rather than rejecting it. There is more than just totally free market on one side and some kind of top-down economy on the other.

In practice the economy we have is heavily regulated. That's not a command economy, or even a partly a command economy, it's just a restriction on the 'freedom' of participants to act in a way that's harmful, or undermines the operation of the market.

A market is neither command and control nor anarchy. It is made up of rules. These rules ensure contracts will be honoured, goods will be as advertised, and that trade can be relied on. They stop market participants from trying to cannibalise each other, stop power distortions in the market, and in general promote a smooth and reliable market.

Without the rules, you have no market.

 

[Togo]

I'd like to see figures in relation to the remark ''Profit margins are usually pretty low''

How low are the profit margins for an average business?
What is the expenditure of an average business in wages?
What ratios are we looking at?

In my industry the recent recession has crashed profit margins down to a mere 35% or so.

In another industry I've been looking at, Steelmaking, the profit margins are much higher but the capital expenditure is out of control. A steel plant I was looking at is a market leader in several areas, but will need to replace their BOS plant soon, a mere snip at £500million.

In a corner store I looked at, profit was largely non-existent, because the purpose of the family firm was not to make a profit at all, but to employ as many family members as possible.

 

[Loren Pechtel]

I'd like to see figures in relation to the remark ''Profit margins are usually pretty low''

How low are the profit margins for an average business?
What is the expenditure of an average business in wages?
What ratios are we looking at?

In my industry the recent recession has crashed profit margins down to a mere 35% or so.

In another industry I've been looking at, Steelmaking, the profit margins are much higher but the capital expenditure is out of control. A steel plant I was looking at is a market leader in several areas, but will need to replace their BOS plant soon, a mere snip at £500million.

In a corner store I looked at, profit was largely non-existent, because the purpose of the family firm was not to make a profit at all, but to employ as many family members as possible.

Where are you finding such high profit margins?

 

[ksen]

Are you just not paying attention to how out of control corporate profits have become?