Friday, August 7, 2015

Denying Reality

There are several apocryphal stories about foreign lands that tried to make the world change through government decree. I recall one about an ancient Chinese government which, to calm a flooding river, changed its name from something like "savage" to something like "placid". (Sorry, forget the specifics.) Nor is that unique, I recall many times hearing tales about "those crazy foreign lands" or "our ignorant ancient ancestors" which centered on the government trying to change reality by decree. And, of course, everyone who reads them, or hears them, chuckles at these tales, thinking how much more enlightened and rational we are today.

But should they? After all, is not much of our present government intervention little more than an effort to change the nature of reality by government decree. And no -- despite the fears of regular readers -- I am NOT about to launch into a rant against daylight savings time, though it does most closely resemble those ancient examples1. Not that we declare these laws as such. We tend to couch them in terms of macroeconomic nonsense, talking of stimulus and growth and investment. Or else we speak of social justice and fairness and leveling the playing field, and other high sounding terms. But all of them are little more than a fig leaf to hide the fact that the state, without any idea how it will be achieved, are simply decreeing that reality must change, and assuming the state can somehow make it happen. And, no, again, I am not discussing such simple problems as unfunded mandates, or ill-planned proposals such as ObamaCare. I mean exactly what I said, many government actions are little more than the government decreeing that reality is wrong and must change.

Before we move on to the specific problems, let us look at the supposedly flawed and unfair free market and ask, what precisely it represents, as most of these decrees are proposed to supposedly correct failures of the free market. Thus, it would be useful to know before we proceed, exactly what the free market represents.

The first statement I need to make is, despite all the overblown claims of ill informed, but enthusiastic, conservatives and libertarians, the free market is not perfect, nor will it establish the ideal price for goods and services2. Having said that, those critics who use this imperfection to argue for intervention fail to understand two other facts. First, no system is perfect, and so simply proving one system is flawed does not necessarily prove we must change to another. We must be shown that other system is an improvement upon the original3. Second, an economic system cannot be built a la carte, we cannot pick and choose and take pieces of this and pieces of that. If we want a free market, we must have a free market, warts and all. If we begin to make changes, they will have repercussions, will imply other changes, and thus, if we try to create "a free market with common sense regulation", what we will find ourselves with in the end will be something quite different4. Or, to be slightly more specific, if we try to change the free market to eliminate imperfections, those changes will eventually bring about the full implications of the principles they embody, leaving something quite different from what was intended.

I mention all of this not so much because it is relevant to this essay, but to try to demystify the free market. Thanks to its ubiquity -- for reasons I will soon explain -- the free market has been, for better or worse, the target of a lot of praise and criticism, and people have made a lot of outrageous claims. Everything from claims that it is the ideal system, producing perfect results to the opposite claims that it is a tool of oppression hiding the means by which the rich expropriate the poor. And, as always when there are such strong extremes, there have also been the inevitable middle of the road compromisers, who propose to fix the flaws with a few simple patches and thus produce their own perfect system.  So, what I hoped to do above is to argue that, while it is not the perfect system that many think (or the evil one others imagine), the free market is also an integrate, comprehensive whole, and to pile changes upon it is, not to fix the free market, but to take the first steps toward some other system, one which those proposing the changes may not find pleasing.

So, having said all of that, what is the free market? Why is it so different from other economic systems? Why can we not apply piecemeal changes to it? And why am I going on at such length about the free market in an essay about government intervention and denying reality?

What everyone seems to forget -- likely because of all the economic theory that has been built upon the foundation of the free market5 -- is that the free market is, in itself, nothing more than the baseline of human economic interaction. Or, to put it more plainly, it is the most simple form of economics. It is, in essence, the bare minimum needed to speak of economic interaction. Granted, when we speak of the free market today, we do so with the assumption of some protective government settling disputes and protecting property, so there is a small layer of government added on to those interactions, but in truth, the free market can exist -- and has -- in some form even without formal government. Those minimal government protections simply embody collective versions of the protections one would have had to provide himself in a time without government. They do not change the nature of the market6. But, regardless of whether the state is involved in enforcing agreements or not, the free market, for all that has been written about it, all the many volumes of panegyrics and vituperation, is nothing more than voluntary exchanges between individuals. That's all it is, nothing more, nothing less.

That is also why I say that nothing can be added without making it something different.  Being the most fundamental level of economic interaction, to add anything would be to create something different. Not to mention, as I have many times, that, once a change is made, the principle underlying that change will begin to express itself, to run to its logical conclusion, meaning that even a small change will often result in much more significant alterations. But even were that not so, any change, any imposed alteration, no matter how small, will end up changing the free market. No longer will it be nothing more than the voluntary choices of individuals, but, instead, a system which, in some way, is the coerced behavior imposed from outside. For it to remain a free market it must, quite simply, remain free. Anything else may resemble the free market in some aspects, may even seem free to the majority of participants, but it is not the simple system which is the true free market.

Which brings me, at long last, back to my original point, the denial of reality. You see, the government has but two real means of accomplishing economic change, it can use coercion, telling individuals they must not do this or must do that, or they can apply funds, circumventing the market by taking funds appropriated from some individuals and applying them elsewhere. All economic intervention, in the end, can be reduced to these two approaches. And, in some cases, they are enough to accomplish what the government hopes to accomplish. In others, such as we shall discuss in a moment, the application of force and funds is not enough, the state is trying to decree nothing less than that reality itself change, and no amount of force or funds will make that happen.

This is not to say government intervention cannot work, or at least accomplish specific goals to some degree. For example, prohibition of various types, while rarely entirely successful, can reduce demand and even, at times, change societal perspectives. For example, at one time opiates were available over the counter and commonly used for sleeplessness, pain, even as a remedy for diarrhea. Of course, those who used them recreationally were looked down upon by respectable society, in the same way as those who drank to excess and others who demonstrated a marked lack of restraint, but there was no general societal disdain for opiate use. However, with the government intervention into the opiate market, there was a marked change7. Opiate use was severely limited. For a time, some small amount remained on the consumer market (paregoric, codeine based cough syrups), but even those vanished after a time. And, at the same time, society came to view opiates with distrust, to the point where there was pressure even to limit medical use for pain relief. Of course, none of this stopped various individuals from desiring to use opiates recreationally or otherwise, nor did it prevent a fairly robust illicit trade, but the government definitely did accomplish a portion of their goals8.

On the other hand, there is a large percentage of government intervention which falls into the realm of fantasy, of attempting to alter reality by passing a law. There are laws which proclaim a goal which they simply cannot achieve, there are laws which demand behavior which is logically impossible, and there are many others. Perhaps it would be easiest to understand if we looked at a few examples.

The best example has to be minimum wage laws. These laws have but one effect, that of ensuring the marginal part of the workforce will not be employed, and yet is sold as providing the opposite, that is increasing the wages of the market as a whole.

The plain fact is, the free market establishes optimal wage, at least to the degree that is possible9. There may be a few degenerate cases where some sub-optimal wage could be maintained for a period of time10, but even those would not resist the free market forever11, or even for long. The fact is, negotiation between employer and employee results in wages which tend toward a balance between productivity and wages. Obviously, as with all free market processes, the market is constantly adjusting itself, it is never exactly at the point of equilibrium, and in each individual case there may be more or less deviation from what an ideal theoretical market would predict12. But overall, the free market, because it pits the greed of employee against the greed of employer, and the greed of one employer against that of all other potential employers13, ensures wages will tend toward the highest viable level.

Thus, in a free market, all individuals will tend toward employment at a wage commensurate to their productive contribution. Of course, there will be those reluctant to work, and those who insist on working in fields for which they are ill suited, as well as those whose skills simply do not make them marketable, but those individuals will continue to exist under any system which does not actual coerce individuals into labor. Because this situation is reasonable for both the worker and the employer, it will be quite stable, and, to the degree it is possible, produces the optimal outcome, in terms of both output and individual satisfaction.

Which is why minimum wage laws are so absurd. There simply is no way to increase wages by decree. An employer will employ a worker so long as his wages are offset by a comparable amount of production. If someone produces $4 per hour, he will be employable at any wage up to $4 per hour. If the law decrees that everyone must be paid $5 per hour, it will not increase his wages, it will simply make him unemployable. Unless a minimum wage law is accompanied by some sort of government subsidy for those whose wages are lower than the new minimum14, such laws will not accomplish their goal of raising overall wages15, but will simply increase unemployment.

If anything, minimum wage laws are not only an attempt to change reality by decree, they are an example of such an effort which accomplishes the opposite of its stated goal. The purpose of the law is, simply put, to raise the wages of those presently earning the lowest wages, that is to increase the earnings of those with few skills, those newly entering the market, and others who, for various reasons, cannot earn higher wages. However, by disallowing employers from paying wages matching their skill and experience16, the laws do not elevate them, does not increase their earnings, it makes them unemployable. Well, not completely unemployable, as a number of dodges exist to work around minimum wages. For example, unpaid internships are usually still allowed, as are wages below minimum wages in certain areas, such as piece-work, or jobs where tips form a large part of the income. However, those tend to also be the lowest paid among low paid jobs, which means, rather than taking a job paying a consistent $5 per hour, now unskilled individuals must rely upon inconsistent tips, the ups and downs of piece work, or take an unpaid internship until developing skills sufficient to merit the minimum wage. Nor is that the only issue, as such laws also encourage a variety of illegal, or semi-legal dodges, such as employing under the table, or hiring alien workers, either legally at low wages as guest workers, or simply outright employment of illegal aliens. All of which reduces farther the jobs available for the low skilled employees, or, in the case of under the table employment, farther reducing their wages, and eliminating any legal protections they might have had17.

A similar situation prevails with the related legal realm of laws related to labor unions. Of course, in a way, this area is slightly obscured, because the government does not precisely grant unions all the powers they possess, instead, by forcing employers into collective bargaining, and bullying them through various regulatory agencies, they implicitly grant unions many powers without having to make any explicit decrees. Still, in the end, whatever the means by which these powers are granted, unions are a government creation18, and one which, again, tries to alter reality through government decree.

Unions are, at least in their present incarnation19, an effort to raise the wages of workers in a given industry above that established by the market. They often have a variety of other goals, such as tying advancement to seniority rather than merit (or any other scheme), increasing the number of jobs for given skill sets, excluding non union workers20 and so on21, but their primary aim is to ensure above market wages for their members. And that, as we saw above, is something that simply cannot be accomplished, though, in some cases, the unions give the appearance of doing so because of confounding factors.

The basic fact is that unions cannot increase wages above market any more than minimum wage laws can. And, in our current economy, industries which have been unionized are generally not those which can set monopoly prices, or maintain sub-market wages22. Thus, when unions struggle to raise wages, they are inevitably fighting to raise them above what the market would set. All of which means that unions, like the minimum wage, are an attempt to use government power -- in this case delegated or implied power -- to deny reality.

Some are surely asking "if unions cannot raise wages above market, then how is it that unions succeed in getting pay increases, and the companies continue to function?" It is, superficially, a valid question, but only superficially. The answer, as with many such questions, is, while things seem to be running well for the moment, it is only so because the ill effects re hidden from view.

In the case of unions, a wage increase can have only one effect, a decrease in the number of workers employed. For a given position, in a free market, wages will usually cover a range of values, matching the skill of the workers23. Unions have a tendency to eliminate these ranges, or at least to restrict them to a few brackets based on seniority. Thus, in a union shop, rather than a range of wages form $X to $Y, you will have one wage bracket somewhere in between. Thus, when wages are raised, in a given bracket, some workers will no longer be worth the wage, while others still will. And so, when union forces wages up, the obvious reaction is to reduce the number of workers.

However, in many cases that simply cannot be done. Contracts do not allow for firings without cause, union featherbedding rules require a specific number of workers per position, a given plant requires a certain minimum work force to operate and so on. For whatever reason, in many cases union workers cannot be simply laid off24. Normally, under such circumstances, with costs rising, companies would respond by either cutting production or closing down. But, again, in some union cases, especially heavy industry, because of long term costs, this is not possible. To make the explanation simple, many heavy industries invest massively in plant, and thus have massive ongoing costs. Given that, even if they operate at a loss, they would suffer even greater losses were they to simply shut down. Given continuing costs, it makes sense to keep running for a time, to offset those costs, though, once those costs are amortized, the inevitable happens, and the shutdowns begin25.

Were that all, it would still be easy to argue that unions are attempting to defy reality, but, unfortunately, a number of unionized industries manage to avoid this fate, and thus the belief continues that somehow unions are pragmatic responses to unfair treatment of workers, that wages are arbitrary and can be raised at will. There are three reasons this illusion can be maintained.

First, there are many cases where union wage demands do produce the predictable result -- layoffs -- and yet somehow this passes unnoticed. Or, in the alternative, union demands sometimes come at a time when wages are rising throughout the economy, and thus the good economy makes these demands largely irrelevant. In both cases, it is usually a sort of sleight of hand involved. For example, in a number of industries, such as longshoremen or steel workers, strong union pressures were matched, eventually, by a system wide loss of jobs and a partial collapse of the industry. However, in those cases, the union rarely takes the blame, with the downturn blamed on a bad economy. On the other hand, on those few happy occasions, when union demands are rendered harmless by a strong economy, though wages are rising everywhere, the union is given credit for wage increases. Thus, unions might be trying whole heartedly to deny reality, but many times the harm they do is blamed on the economy in general26.

A second way in which union harm is avoided is through large scale automation. In some cases this simply is not possible, as union contracts demand certain employment levels, or require employees made redundant by machinery be employed elsewhere. Such anti-technology clauses are not as popular as they once were, but modern unions still have ways of avoiding losing jobs to automation. But, in those cases where automation is not foreclosed by union contracts, substituting capital investment for labor is often cost effective should unions make excessive demands. The example that first comes to mind is the steel industry, at least in the US, where, after decades of decline, at least partly due to unionization, the first firms to make a show of renewed growth were those that had invested heavily in automated processes. And it only makes sense. If any single input becomes unduly expensive, the obvious solution is to economize on that input by substituting others. In the case of unions, the cost of labor is increased, so it makes sense to spend money to limit the need for labor. In a number of cases, where union demands were not so excessive that any amount of labor was unduly costly, and where automation was both available and affordable, it was possible to remain in operation, even with elevated union wages, through replacing some workers with machines.

The final way in which companies remain in business despite union pressures is the most damaging, and the most misleading, as often the companies in question not only remain in operation, but give the appearance of prospering. These are the companies where unionization effectively excludes new entry into the market and creates what amounts to a cartel of those firms employing unionized labor.

There are any number of businesses which fall into this category. The auto industry once met this description, though in modern times non-UAW shops are no longer nearly impossible to imagine, as they once were. Hollywood -- or films and television -- are another example, with unions controlling everything from actors to writers to directors, sound, editors and more27. In these two cases, as well as others, the fact that one must work with the union to simply enter the market imposes tremendous costs upon newcomers. Existing firms have already paid all the costs of setting up shop stewards and grievance committees, have already learned how to negotiate with the union, have established contracts and so on. Newcomers, with none of these costs, and none of that experience, are likely to find it tremendously burdensome to establish a new firm, and even if they do not, their first efforts at negotiation will likely persuade them to pursue some other career. Even before those problems, before a newcomer starts out at all, there is the even larger problem, that being the fact that unions, by increasing wage costs, reduce overall profits, and, as a consequence, investors are reluctant to lend money to launch a venture in a unionized field. it would be exceptionally difficult to find money to enter this industry at all.

As a consequence of this, industries with strong unions, where union involvement in new ventures is expected, will find themselves an effective cartel, allowing them to raise prices, partly offsetting the costs of union wages. Of course, in some cases, foreign competitors make this impossible, but in others, such as the auto industry for many years, protectionist measures allowed the continued charging of cartel prices. In effect, this shifts the burden of union wages from the employer onto the general public. And so, while neither union nor employer suffers, or suffers the full cost of their actions, the public experiences higher prices and reduced supply. Which is truly the only way in which unions can increase prices without either losing jobs or driving employers out of business.

Let us move from wages and look at some other areas in which the government has tried to legislate away reality. One area particularly rife with laws legislating away reality is that of financial and monetary matters28. Why, the fact that we accept as currency a piece of paper without intrinsic value is itself a testament to the imaginative power of the government29. But, since many people do not agree with my views on the gold standard, let us leave that alone and look at some more obviously reality-challenged legislation.

One of the best examples of this may be the subprime lending fiasco that trashed our economy a few years ago. Now, so much nonsense has been written and spoken about this that I can't being to unravel it here30. From claims that somehow bad loans made lenders rich to the idea that... well the idea that bad loans were good for anyone is just nuts. Enough said. But as so much nonsense has been passed around, and since people tend to have mistaken, distorted ideas of banking31, let me just offer a simple description of loans.

Banks make all their money by making loans, period. Well, maybe they get a small amount of income from ATM fees, or credit card fees, and a few other odds and ends may provide some small amount of revenue, but by and large lending is how banks make money. And what do they lend? Why, the money you deposit there! If you have an account at a bank, you are a lender. Whether you think lending is usury, or loans are evil exploitation or what have you, if you have a bank account, you are lending money. After all, how do you think banks pay interest? It is basically your cut of the loan revenue, the interest charged on your money. Part goes to the bank, part to you. That is how banks work. Always have, always will.

But, since loans are their sole source of income, and as they need to have that money come back to them so they can give it back to depositors like you when they request it, banks need to ensure their loans are paid. At least paid regularly enough that the combined principal and interest allows them enough money to cover their deposits, pay interest and pay the operating costs of the bank. In order to do that, they must give loans to people they think are likely to pay it back. But, at times, there are not enough people with impeccable credit asking for loans, and so banks make some allowances, and offer loans to those with somewhat inferior records (or no records), but to ensure they get enough money back, they allow for a number of missed payments by charging extra interest, so when one out of every hundred borrowers default, the extra interest of the other ninety nine make up the difference.

You see, banks are not evil or greedy32 or trying to work over the little guy, they are simply operating their business responsibly. You would not be very happy, would you, if you went to your bank and they could not cash you check because they had too little cash? Or if they said they could only give you 50% of your deposit because they made too many bad loans? Well, if you want them to handle your money responsibly, they must be hard headed about loans, must set interest rates to ensure they get a sufficient return, and enforce the terms of those loans when lenders default. They are not running a charity, they are taking care of other peoples' money. It would be irresponsible of them to simply give the money away because someone fell on hard times.If the depositors want to give their money away, they should do it themselves. Banks exist to ensure money is handled well.

As a consequence of this fact, banks tend to set their rates so that they get a return comparable to other relatively safe investments. Of course, there are always mistakes, one bank may underestimate risk, or may charge too little interest, another may charge too much, but in the long run, these errors are self-correcting, as setting interest too high means money will not be borrowed, and revenues will fall until the rate is adjusted. Likewise, excessive risk will bring about failed loans, which will leave less to lend, and ensure a more conservative approach to future loans. In short, as with all free market processes, the market forces tend to be self correcting, and self interest tends to force individuals to move toward the optimal prices, or in this case, rates of interest33.

All of which is a very long way of saying, banks give loans to those they expect can pay them back. If they deny a loan, it is because either they think the borrower will default, or else because the borrower's income is too low to both pay back the loan and meet his likely expenses. Banks do not deny loans out of malice, or set rates of interest arbitrarily -- if they did, they would not last long -- and so, trying to circumvent this process, as was done with the subprime fiasco, is simply to ensure that loans will be created which are exceptionally likely to default.

Unfortunately, the regulators behind the quasi-government mortgage insurance schemes did not understand this. Or at least the politicians who gave them instructions did not, or professed to not understand. Their claim was that banks simply denied out of malice, or racism, or ignorance, perhaps. The loans they were denying were no more likely to default than any other lenders, and those they charged the highest interest no worse than those they charged much lower rates. And so, to ensure these maligned people could get loans, the government stepped in -- via these quasi-governmental bodies -- and guaranteed payment on loans that would not otherwise be made, at rates far below those the market would set, could such lenders even be found.

In the minds of the government regulators, this would ensure that these poor people could get loans they would normally be denied, and thus would make the world a better place. In truth, it meant that loans that the best understanding of all those experienced in the field agreed would not be paid back, were made with great frequency, and, as predicted, were not paid back. In some cases it was as simple as the fact that, as the lenders claimed, the loan amount was too great for the borrower's income, and thus he could not afford to pay. In others, the borrower's history of irregular payments and spotty employment history turned out to indicate that he would, as in the past, fail to make his payments. And so, by trying to legislate a change of reality, a law intended to magically turn bad risks into good, the government created  huge mass of bad loans.

Now the fiasco itself came about as a consequence of what was done later, the efforts to encourage lenders to buy and hold such risky loans, the abuse by some unscrupulous lenders and borrowers of a system which basically short circuited all common sense checks before lending money, and a number of other ills that grew out of this first mistake, and the refusal of the state to admit it had been a mistake. But, regardless of what came later, the fact does remain, the whole fiasco would not have been possible, had not the state tried to turn bad risks into good by simply saying it was so in a law. Once again, the state attempts to legislate away reality.

I was going to expand upon the monetary topics even more, by discussing how student loans, far from making us better educated, simply made us more educated, making a bachelor's degree the equivalent of a high school diploma in the past, flood schools with easy money leading to many dumbing down degrees to bring in extra cash, and so on. But I have written on that before34. Similarly, I was going to discuss the topic of money itself, especially inflation, how the state tries to use inflation so that it can spend money without having to take it from the public (all pure illusion, of course, created by denying the truth that everything we use has to come from someone), how the belief arose that managed currency could bring about "constant growth", a nonsensical belief that persisted even as the Federal Reserve, after just a little more than a decade, brought about the worst depression we had ever seen. So much for constant growth, yet the belief persisted that, by making more paper and calling it money, we could enrich ourselves. But, again, I have written so often on that topic35, I have little new ground to cover. And, in any case, this essay threatens to stretch on into eternity if I don't wrap it up soon. Already three digit footnotes are seeming a real possibility.

So, rather than more about money, let us close by looking at one last topic, one recently debated, and still in the news. That being the concept of universal health care, and the absurd denial of reality it embodies. It is a good closer, not only because it is current, but because the error underlying it is the same mistake found in so many economic schemes.

To hear advocates of universal health care describe our problems, you would think that "health care" is some sort of magical substance, something like rain, that simply falls to earth from the aether, which is the gathered and hoarded by vicious insurance companies. After all, according to all the studies trotted out in favor of ObamaCare, we "have enough health care", it is simply a problem of distribution. Rather than making sure this mystical health elixir gets to all who need it, greedy insurers bottle it up, and only dole it out to those who pay. The implication being, that such a demand is clearly unfair, antisocial even, as health care is a "right", something we all should receive by virtue of being born. And, since ti is a magical something that just falls from the sky, why not?

This argument suffers from the problem of all schemes for redistribution, all calls for a "more just sharing of wealth" and the like, the counter-factual belief that wealth, services, everything just somehow appears, that it is magically created and then evilly hoarded by some sinister force. The truth is, all wealth, all health care, everything exists only because someone makes it, provides it, does something. And that someone is not going to do whatever he does for free. Thus these plans for redistribution, once they discover health care does not fall from the sky, have a terrible choice to make. They can go the brutal authoritarian route, simply forcing all providers to do what they say, essentially making slaves of doctors and nurses so their plan will succeed. Or they can try to pay for it themselves, which will quickly make them realize the problem is not one of distribution, but of scarce and expensive resources. Health care is not limited because of greedy doctors, but because people, even sick ones, want things in addition to doctors and nurses, and so only so many resources go into health care, which means there is a limit to how much there is, and the costs can be quite high.

And that is where the government chooses to part with reality once again (well, for the second time, considering how they originally conceived of health care). Knowing they could never afford to actually pay market prices to provide all they promise36, they decide that health care is simply so expensive because of greed, not because of any market, and they proceed to pay for the services, but only as much as they think fit, imaging that if they decree something is worth only so much, it will be so. Of course, as should be obvious by now, this will never work. If the payment is so low it won't cover costs, doctors will simply stop providing it, or, if forced to do so, simply stop being doctors entirely. On the other hand, if the payment will cover costs, but provide a substandard return for the effort required, then many doctors, especially the best ones who can find other employment, will abandon the field, and thanks to the low returns, the industry will be monopolized by the low end of the scale, those willing to accept substandard payment. In short, the state, though it refuses to believe it, will find you get what you pay for. Of course, as the consequences become obvious they will again deny reality, blame the greed of doctors (ignoring their greed in refusing to pay market price, and the voters' greed in demanding something for nothing), and claim they just need more authority, but the fact remains, reality does not change because someone passes a law.

Which is my point throughout all of these examples. Reality is what it is, it is immutable, the rules set. No matter what you wish, what you want, no matter what laws are passed, reality will not be moved. Sadly, the government, as well as many of our voters, seem not to recognize that fact.

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1. I have written about this topic enough already. See "A Very Quick Thought on Daylight Savings", "Arrogance", "My Message to Congress" and "Government Cheese?".

2. See "Third Best Economy","Greed Versus Evil", "Of Ants and Men", "Moral For Me, But Not For Thee", "Big Box Stores and the 'Climate of Greed'", "Symmetry and Greed", "Competition", "The Basics", "Planning for Imperfection", "In Praise of Contracts", "The Problem of Established Perspectives" and "Misunderstanding the Market".

3. See "High Cost of Medical Care","Government Efficiency", "Medical Reform, An Overview", "The Absurdity of Mandatory Insurance", "Clarification of my Argument for a Free Market in Medicine", "Preexisting Conditions", "Misunderstanding Profits", "Government Quackery", "Two Examples of "Inefficiency" in Capitalism", "The Devil is in the Definitions (And Assumptions)", "Bad Economics Part 10", "Bad Economics Part 18", "Cutting "Costs"", "A Different Look at "Health Care Reform"", "Reviving Nonsense in the White House", "The Problems With "Safe and Effective"", "Again?", "Collective Ventures Versus Government".

4. See "Inescapable Logic", "Recipe For Disaster", "Guns and Drugs", "Common Sense, Guns and Regulations", "Help and Harm", "Hard Cases Make Bad Law", "In Loco Parentis", "The Case for Small Government" and "Harming Society".

5. To clarify: Because so much complex economic theory has been built using the free market as a model -- obviously because it is the most basic model one can use, as well as the model which was found to produce the best results most consistently -- people assume the free market is complex in itself. Nor is this helped by the complexity of the economies of most relatively free economies, which also gives the impression that the free market is complex. However, the truth is, the concept of the free market is very simple, as is the basic level of its function. It may produce incredibly complex economies, and the economic theories required to appreciate it may also be complex, but the concept of the free market is, in itself, something small children can understand. If you doubt this, watch young boys trading cards or toys, or engaged in swaps on various computer games, and you will see clearly they understand very well the basics of the free market.

6. I know some will imagine this contradicts my statement that we cannot order a la carte from the free market, that changes will alter its nature. However, in this case, the change is not to the nature of the market, or its operation, it is simply shifting the burden of enforcement and settling disputes from the actors themselves to the government to which society at large has now delegated such functions. (Eg. Rather than having to use surety bonds held by myself or a third party, or simple threats of force, to ensure compliance, I can now ask the state to enforce contracts instead.) The market functions themselves do not change, nor, for that matter, do the methods of enforcement, all that changes is how such enforcement is provided, and by whom. So, though it may at first appear a contradiction, it is nothing of the kind. An analogous process can be seen in international trade, where, before agreements of cooperation between states, or even now in some states where the state is not reliable or consistent in enforcing foreign agreements, traders must resort to bonds and other measures, while, once states have cooperative agreements, such safeguards are often eliminated, or at least used only in special circumstances.

7. Obviously, there is something of a chicken and egg problem here. Before the state could ban opiates, there had to be some public opposition to their use, but some of that opposition was itself the result of government educational efforts. Thus, there was already some impetus to ban opiates, but that impetus, by leading to government efforts to "raise awareness", followed by prohibition, dramatically increased the public opposition to opiate use.

8. On the other hand, in a way, this can also be seen as an effort to defy reality. The belief that simple prohibition will make the public stop desiring to use opiates, even stop them from buying them, is unrealistic in the extreme. Making something illegal does not change desires one whit. Of course, in a number of cases, desire to obey the law, or fear of punishment -- maybe even simple worry over social stigma -- may be strong enough to overcome that desire, but in others the desire for opiates is stronger. As we can see in states with draconian drug laws, even incredibly harsh punishments, even capital punishment, will not stop all drug use, making it absurd to think passing a law decreeing prohibition is the same as ending drug use. So, while there are some realistic aspects -- that prohibition will end public sale and use -- there are also fantasy elements -- believing these laws will end drug use, an impossibility even after a prolonged enforcement effort.

9. See "Employment A to Z", "More Thoughts on Wage Disparities", "Capitalism and Its Consequences", "Competition", "Another Look At Exploitation", "Fairness and the Free Market", "Exploited Labor", "Capital Investment", "Exploiting Workers?" and "Two Sided Processes and Claims of 'Unfair' Outcomes", "A New Look at Intervention" and "How Wages Work".

10. It is possible, in some unusual cases, a market may be so isolated from alternate sources of employment, that labor is forced to take sub-par wages. However, given mobility and ease of research in industrialized modern nations, this situation is becoming ever less likely. In addition, the availability of such a pool of low-wage labor, given the relatively low cost of relocation and transportation of goods, is unlikely to remain unexploited by competitors for very long.

11. As mentioned above, modern industrial states are the least likely to suffer degenerate cases such as these. Despite the criticism aimed at industrialization and globalism and the like, it is world markets and ready transportation that make it unlikely wage disparities will continue to exist, unless justified by differences of capital investment, infrastructure, local productive conditions, governmental impediments or other valid reasons for wage differentiation.

12.  Of course, there is no way to now what this supposed optimal wage truly is. As I have said repeatedly(""True" Prices", "The Consumption Curve"), those supply and demand curves are a useful fiction. We cannot know at any given moment what the true supply and demand curves are, even for a single good, much less for all goods in the market, which would be needed to determine the optimal wage. Even if some djinn granted us this information,it would be valid only for that split second, after which, thanks to ever changing desires, shifting conditions of production and the like, it would become historical information, no longer relevant for determining optimal wage.  So, when we say an individual's wage may deviate from the optimal wage, we are making some significant assumptions. In truth, even if an individual appears underpaid, it is possible his wage truly does represent his productive output. Or, more likely, represented the HR staff's, or his manager's, best estimate of his potential contribution when last his wage was reviewed.

13. I mentioned this in "Greed Versus Evil", "Fighting the Wrong Fight", "Fighting the Wrong Fight, Part II" and others. For those who have not read my previous writing, the simple version is as follows: In the free market, supposed risks, such as cartels and monopolies, as well as conspiracies to keep wages low and the like, are all made impossible by the fact that each individual is seeking his own benefit. If a cartel all agree to charge $x above market, one of the members could make significantly more by undercutting his fellows. Or, if the cartel remains faithful, a newcomer could easily enter the market, because of the elevated profits, and make a killing simply by charging market price (or even slightly above market, but below the cartel price). In short, the more greedy we hypothesize individuals to be, the more likely the market will operate efficiently. Thus, the charge that greed makes monopolies and other shenanigans likely, also undercuts that argument, as the same hypothetical greed would create competitors who would eliminate such problems, assuming a truly free market, with free entry into markets. (Government restrictions are required to make possible true monopolies, such as AT&T once was, or many local utilities still are. Laws which impose entry costs, such as environmental restrictions, can also make certain monopoly or cartel systems much less likely to collapse, due to the difficulty of new competitors entering the market. See "Imperfect Competition, Abstraction and Anti-Trust", "The Difference Between Public and Private, Or, The Real Monopolies and Cartels", "The Problem of Antitrust", "Consumer Protection, Cartels and the Failure of Regulation", "Put Your Money Where Your Mouth Is, Or The Logical Implications of Price Gouging Laws", "Price Gouging", "'True' Prices" and "Technology and 'Natural Monopolies'".)

14. Even minimum wage with a subsidy would not work as a permanent solution. It would be easy enough to supplement wages with a subsidy at the time the law is created, but how could the state figure who to subsidize in the future? Doubtless, future jobs would not be subsidized, and thus, all new jobs would have the problem described, excluding anyone whose efforts are not worth the present minimum wage. Thus, subsidies, at least under any workable system, would simply defer the problems with minimum wages, effectively grandfathering in a number of low wage workers who are employed at the time the law is passed.

15. It is possible that government figures may show in increase in average wages after a minimum wage increase, since those earning below minimum wage will no longer be employed, and thus, as a statistical truth, the mean wages will rise. It is even possible mean wages may rise without an increase in unemployment, at least eventually, since unemployment is measured as those actively seeking work, and it is quite possible those who know they cannot be hired at present minimum wage will give up seeking work after a time, and thus, on paper, the aggregate numbers for employment and wages may look promising. Of course, the total number employed will drop, but the aggregate figures, such as mean wage, and even unemployment figures, may look quite promising.

16. In truth, employment decisions are more complex than this argument suggests. Theory says wages match the productivity of a worker, but that implies that an employer knows the precise output of a worker, which is simply not true. Obviously, after being employed for a long time, it is possible to predict pretty well what they will do, but there is some degree of uncertainty still. That is why work history makes such a difference in wages. Someone just starting out has no record to prove his worth, and thus there is tremendous uncertainty, reducing his maximum wage. On the other hand, someone with a long history, especially a history with his present employer, presents a very predictable output, and thus allows for a much more precise prediction of his worth. Which is why new employees inevitably earn less than experienced workers with comparable education or training.

17. For example, if an employer decides to pay workers hired under the table less than agreed, he has no recourse to the law. Or should he be injured through the negligence of his employer, the lack of legal record often makes collecting any sort of compensation difficult (In some cases, the illegal nature of the employment may even be used to argue for contributory negligence, reducing whatever damages he may manage to collect.) And, though I am not a supporter of government worker's compensation, government retirement, or even our present practice of tying medical care to employment, the fact remains that those working under the table do not have access to any of those services either, an additional harm done to them by minimum wage laws intended to benefit them.

18. Unions which are not granted government protection, which do not force collective bargaining, closed shops and other beneficial situations through government privileges, are economically unobjectionable, as they amount to nothing more than a club or society of employees. They may be able to enjoy slightly better negotiating conditions with employers, to the degree they represent a considerable part of the workforce, since replacing a large number of workers is not a desirable situation, but they cannot force the same results as government backed, coercive unions, because if their demands become excessive, the threat of a walkout will not be a great enough cost to counterbalance what they demand.

19. At the time of their birth, unions, when they were mere voluntary associations, actually served a purpose in a number of cases. For example, in more primitive times, when information was less plentiful and travel more costly, regional wage variations were more pronounced, making unions valuable for informing local workers of wage imbalances. In addition, in a number of industries, government intervention granted specific industries excessive powers, creating cartels and monopolies, which were especially difficult to eliminate with the higher cost of movement and shipping. In such situations, unions provided a means to petition for an elimination of such inequities. However, most such ills have largely disappeared due to the lower cost of movement and shipping and the ready availability of information. There are still cases where government intrusion into various markets grant excessive power to specific employers, but modern unions are more likely to be a part of such systems, rather than a remedy. (And, in any case, the best answer is not to add more intervention, but to eliminate the original mistake. See "Government Quackery", "The Endless Cycle of Intervention", "The Cycle of Compassion" and "Sleight of Hand".)

20. The exclusion of non-union labor, that is establishing closed shops, is essential to ensuring elevated wages. If an employer is free to hire non-union labor, then there is little possibility of forcing employers to hire large numbers of excessively costly union labor. It can be accomplished to a lesser degree by exploiting laws which prohibit firing employees for union membership (effectively preventing firing any union member, thus eventually creating a closed shop through attrition) but it is much less certain, and definitely less effective than a closed shop. (See "The Interests of Labor Verus the Interests of Laborers", "Pro-Labor Cannibalism, A Look At The Union Food Chain", "The Harm of Closed Shops and Collective Bargaining" and "Time For Unions To Go The Way of the Dinosaurs".)

21. At various times, unions also had goals which moderns would find offensive, such as excluding minorities, certain ethnic groups, or those holding unacceptable political ideas (such as anarchists). Obviously, no modern union holds such goals as part of its agenda, but it is worth noting that historically unions have had a wide range of goals, some of which were less than respectable even to those who support modern unions.

22. At least this is usually true prior to unionization. Afterward that may not be the case, as we shall discuss later. On the other hand, many monopolized industries are monopolies because they are subject to a degree of government interest, such as utilities, and, because they are so heavily regulated, the government usually either prevents unionization, or creates a weak, government supervised union -- eg those associated with Amtrak. (In the interest of full disclosure, I should say, until he retired, my father was a member of the Amtrak police officer's union.)

23. To be precise, wages are commensurate with not just the skill of the worker, but with the diligence with which he applies it, the consistency of his work, his availability for overtime when needed, his willingness to relocate if relevant, and a host of other factors large and small. In other words, he is paid based upon not just the output he produces for the company, but also the degree to which he reduces its employment costs (eg but not requiring other workers substitute for him when not available). But, like most of the free market, all these terribly complicated considerations are normally hidden, even from those who make the relevant decisions, in part or whole, by using monetary calculations. In this way, we can use figures such as sales, lost production on sick days, cost for temporary workers and so on, to represent all the many factors involved in determining the worth of an employee.

24. On the other hand, in many cases they can, and are. Longshoremen, for example, because of elevated wages, forced many ports to automate a large number of processes, resulting in ever fewer jobs available for their members.

25. The steel industry was a good example of this. When strong unionization came to the steel industry, there was no initial massive round of layoffs or other signs of the increased cost. What did happen was that steel makers stopped expanding, stopped investing in new plants, new hardware, and certainly gave up researching new processes. (Or, to be precise, did so once the post-war boom stopped compensating for union demands.) But for a time, they did continue to maintain their old, established processes, keeping up business as usual, at least on the face of it. But, eventually, once the costs of their old plant had been amortized, and outstanding bonds retired, those old plants started to shut down, and only a handful of the most efficient producers remained in business on a greatly reduced scale. (Eventually, automation would allow for a partial revival of American steel, as we shall discuss shortly.)

26. Inflation may also offset much of the harm of union demands, though usually through the initial burst of feverish activity, not -- as Keynes imagined -- because it would erode wage increases. (Unions wisely insist on escalator clauses, COLA indexing and so on.) But as we will discuss inflation on its own later, I won't go into that here. (See "Shorthand and Confusion", "Clarifying a Reality of Capitalism" and "The Rubber Yardstick".)

27. Actually, trying to escape the costs imposed by such unions has driven a number of low budget television and film productions to Canada, and inadvertently subsidized the Canadian film industry. See "Canada, Subsidies, The Free Market and Intractible Reality".

28. See "Monetary Issues Made Simple Part I" and "Monetary Issues Made Simple Part II".

29. This is most notable because that paper once represented a claim upon very real gold or silver. That we went from a dollar representing a check which could be cashed in for something of value to a slip of paper backed by the full faith and credit of the US government, representing nothing, seems a sick joke. Or would, were it not reality. See "What Is A Dollar?", "What Is Money?", "Why Gold?" and "The Gold Question, Not "Why?" But "When?"".

30. See "And You Got Rich?" and "Not Entirely to Blame".

31. See "Those Greedy Bankers", "Mergers and Acquisitions" and "Post Hoc, Ergo Propter Hoc".

32. At least no more greedy than anyone else in the economy. See "Moral For Me, But Not For Thee", "Greed", "Greed Part 2" and "Symmetry and Greed".

33. This is why I find some banking regulation so absurd. For example, the no longer effective "Regulation Q", which prohibited paying interest on demand deposits. The theory was banks would compete to offer higher rates of interest and thus end up losing money and failing. Why this would happen only to demand deposits, but not savings accounts, I could not understand. Nor, why banks, unlike any other business, would engage in self destructive pricing, mystified me. Then again, the same theory underlies the regulations limiting hospital competition, and purchase of medical devices, so apparently it is a common belief in the government world, no matter how little it describes any actual economic phenomenon that ever took place.

34. See "The State Versus Universities", "How to Throw Away Money... Patriotically" and "When Help Hurts".

35. See "Fiscal Discipline", "Putting the Bull in Bull Market", "The Inflation Engine", "Inflation and Uncertainty", "Bad Economics Part 7", "Bad Economics Part 8", "A Thought on the Clinton Surpluses", "Explaining Past Crashes", "Place Blame Fairly, Regardless of Party" and "Proof Keynes (and Krugman) Are Insane".

36. Actually, this is a good thing. Were they to pay market price, the result would be terribly damaging as well. By distorting the market so badly, placing such a high percentage of our resources into health care, we would be left with rather disappointing quantities of everything else. It would result in a grotesquely distorted economy, which would be difficult to correct, as the massive government payments would allow for large capital investments that would continue to distort the economy for many years to come.


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