On Rereading "Atlas Shrugged"

Despite a number of differences I have with Ayn Rand on issues of religion and philosophy, her 1957 magnum opus, "Atlas Shrugged," definitely steered me away from the leftist upbringing I had, and introduced me to the world of conservative ideas and authors: Ludwig von Mises, Henry Hazlitt, Milton Friedman, Isabel Paterson, and many others.

Universally panned by literary critics of the day, "Atlas" was, nevertheless, a bestseller in 1957, and continued to sell about 100,000 copies a year for 51 consecutive years. 52 years later -- just after the inauguration of zerobama -- "Atlas" has apparently tripled its sales and has been flying off the shelves at bookstores.

For those who have never read it, "Atlas Shrugged" -- originally titled in its draft form "The Strike" -- is about a mixed-economy United States falling rapidly into full-fledged socialism. As it does so, all the highly competent people of individual accomplishment -- in business, science, and the arts -- mysteriously start to resign their positions, quit their jobs...and disappear. Naturally, the disappearance of these achievers -- these "Atlases" whose productivity carries the rest of the world -- causes the crash of the economy and society in general to occur ever more rapidly. Why these people are disappearing and where they are going is the core of the plot...which I certainly won't give away. Love her style of writing or hate it, "Atlas Shrugged" is relevant and essential reading today.

I read it twice in rapid succession in high school, lo these many years, and am now rereading it in light of the aggressive attempts at a socialist coup in our country. There's a passage toward the beginning of the novel that flabbergasted me, since it predicts with great accuracy the "bailout mentality" started by Bush and continued and augmented under zerobama. The passage also describes how industry is complicit with government in its own regulation and what it expects to gain from it (i.e., protection from competition).

The scene has to do with attempts to regulate the railroads, an industry that plays a starring dramatic role in the novel, as well as being an effective visual metaphor for goal-oriented achievement in general.

Here is an excerpt of Miss Rand's description of the regulation from "Atlas Shrugged":

"The proposal which they passed was known as the 'Anti-dog-eat-dog Rule.' When they voted for it, the members of the National Alliance of Railroads sat in a large hall in the deepending twilight of a late autumn evening and did not look at one another . . .

. . . No railroad was mentioned by name in the speeches that preceded the voting. The speeches dealt only with the public welfare. It was said that while the public welfare was threatened by shortages of transportation, railroads were destroying one another through vicious competition, on 'the brutal policy of dog-eat-dog.' While there existed blighted areas where rail service had been discontinued, there existed at the same time, large regions where two or more railroads were competing for a traffic barely sufficient for one. It was said that there were great opportunities for younger railroads in the blighted areas. While it was true that such areas offered little economic incentive at present, a public-spirited railroad, it was said, would undertake to provide transportation for the struggling inhabitants, since the prime purpose of a railroad was public service, not profit.

Then it was said that large, established railroad systems were essential to the public welfare; and that the collapse of one of them would be a national catastrophe; and that if one such system had happened to sustain a crushing loss in a public-spirited attempt to contribute to international good will, it was entitled to public support to help it survive the blow . . .

. . . The Anti-dog-eat-dog-Rule was described as a measure of 'voluntary self-regulation' intended 'the better to enforce' the laws long since passed by the country's Legislature. The Rule provided that the members of the National Alliance of Railroads were forbidden to engage in practices defined as 'destructive competition'; that in regions declared to be restricted, no more than one railroad would be permitted to operate; that in such regions, seniority belonged to the oldest railroad now operating there, and that the newcomers, who had encroached unfairly upon its territory, would suspend operations within nine months after being so ordered; that the Executive Board of the National Alliance of Railroads was empowered to decide, at its sole discretion, which regions were to be restricted . . ."

Losing my touch, huh?

Yep.

So now let me give you some more of my mind. (I have enough to go around.)

I hear that a lot . . . by only from you. No one else on FR appears impressed.

The two prior responses show you first how theoretically the typical minwage analysis could theoretically be flawed. Next, with empirical backup, you can see there is evidence that the theoretical has actually occurred.

You haven't given me theory (you've merely said that such arguments exist somewhere on the Web), and you haven't given me empirical backup (you've merely claimed that it exists, somewhere).

Now let me show you once again why and how the von Mises analysis is less than satisfactory.

Von Mises? You mean Ludwig von Mises? How did he get into the discussion? You were harping on someone named "von miser" whom I never heard of. Anyway, this is not specifically an analysis by Mises. It's just ordinary, sound economics (the kind that actually concentrates on how real individuals actually make choices).

Review von Mises, the part where he goes into the marginal productivity theory: “the wages paid by the employer for every type of labor are exactly as high as the increment of value that it adds to the materials in production.

So far, so good. In other words, "wages are ultimately determined by the marginal productivity of labor." That's how it's usually stated, not just by Mises but by everyone else who has studied the subject.

Wages cannot rise any higher than this because, if they did, the employer could no longer make a profit and hence would be compelled to discontinue a line of production that did not pay.”

Still making sense. Another way of saying exactly the same thing is this: An employer will not pay an employee more than he's worth -- i.e., the boss will not pay the worker more than the worker contributes in value to the business.

That stuff just doesn’t happen 99.99% of the time.

It happens 100% of the time, but only in those businesses that can operate according to standard accounting notions of "profit" and "loss".

Such a thing would be exceedingly difficult to measure.

Nothing is easier for businesses -- especially a business in the private sector that operates according to ordinary notions of "profit" and "loss" -- to know when they are operating at a profit and when they are operating a loss. The difficulty your common sense alludes to is usually overcome by the following very subtle procedure: The business in question adds up the money it took in during a certain period, and it then subtracts the money it spent on costs (including, of course, wages). If it just hired a new worker -- the "last" worker or the "incremental" worker or the "marginal" worker (the terms "last", "incremental", and "marginal" mean the same thing) for $5.00/hour and an 8-hour day, then it's paying this marginal-incremental-last worker $40/day, or $200/week. If the business -- a hamburger joint -- fails to sell MORE than $200/week of additional burgers, or fries, or Cokes, then that new worker is a waste of the worker's time and a waste of the hamburger joint's money. There's no point in keeping him if the business merely breaks even; and there's certainly no point in keeping him if the additional wages ($200/week) are more than the additional income (e.g., $150/week). Now here's a very, very difficult and subtle operation: take the additional-incremental-marginal income ($150/week) and subtract the additional-incremental-marginal cost ($200/week). Careful. I might be trying to fool your common sense with reason and logic. Let's see, I think the difference is -$50/week. This means the business is losing $50/week. Can the burger joint continue to operate if its cashflow is -$50/week every week? Careful. It's a very, very tough question. It cannot be answered merely by reason, logic, and knowledge of economics. All sorts of very sophisticated empirical studies must be done to determine if a burger joint can stay open if it suffers negative cashflow every week.

So, you're right. These things are very, very difficult to measure.

Someone with knowledge of economics (though not someone constrained merely by "common sense" without any knowledge) notices something more -- something more subtle that the owner of the burger joint doesn't have time or the inclination to notice because he's too busy running his business and studying his profit-and-loss statements. The economist notices that IF the burger joint purposely continued to run at a $50/week loss, it would mean that it is wasting its resources; society at large values other things more than it values burgers (and it values these other things $50/week more than it values burgers). How do we know? Because if it did value burgers "what they were worth," then -- by definition -- the burger joint would be making a profit: it would mean that the product the joint produces -- "Burgers" -- is more valuable to consumers than the "factors of production" (land, labor, capital) that went into its production. That means that the burger joint -- simply by taking land, labor, and capital worth $XX.00/burger and rearranging the elements to make a burger that lots of people want to buy at $XX.00+n/burger -- is adding value to the entire economy: it's taking something that people value less (some land, some labor, and some capital) and giving them something that they value more (the burger). If a failing burger joint were to be "bailed out" by receiving a taxpayer subsidy, so that it could afford to continue losing $50/week, it would mean that the government has redistributed many people's wealth in order to allow the burger joint to continue to misallocate land, labor, and capital in the amount of $50/week. The subsidy, no doubt, helps the burger joint; but it harms everyone else. The $50/week loss might be diffused over the whole economy, but it's still a real loss. Conversely, were the burger making a profit, the additional value it created would also be diffused throughout the entire economy, but it would nevertheless be real value.

Your average economist could not do it, much less your typical nincompoop business manager.

See above. QED.

Think about it. Bob owns a restaurant. He thinks he needs to hire one more dishwasher. How does he go about figuring the “increment of value” such a dishwasher would add?

He doesn't. He figures out the increment "ex post" -- after the fact -- by looking at his profit and loss statements. The additional profit he makes (or hopes to make) by hiring that additional worker IS the "increment of value." The reason he figures it all out "ex post" instead of "ex ante" (before the fact of hiring the new guy) is that even a smart business manager cannot literally read minds and foretell the future state of the market. The burger joint owner might have a hunch as to the future state of the market for burgers ("Let's see. A new move theater is being constructed. That'll mean lots of kids going out on dates. That'll mean they'll want a place to hang out before and after the show. Better spruce the place up and hire another waiter, another cook for what I expect will be Friday and Saturday midnights, and a busboy.") He knows the wage he'll pay, and he knows the additional burgers he'll have to sell to exceed the additional wages. Could he be wrong? Of course. Happens all the time. If he's wrong, he releases the new workers (in a process usually known as "firing"), and these workers now go elsewhere...perhaps they get jobs at that new movie theater as ushers, candy-counter staff, etc.

He can’t and he doesn’t. How then does he know what such a dishwasher is worth?he doesn’t. He just knows that Joe, down the street pays minimum wage for his, so Bob will pay the same. The same thing goes for waiters, cooks, servers, bookkeepers, greeters, etc.

See above. He guesses what the incremental value will be because he cannot literally predict the future. He can, however, know for CERTAIN what the past WAS, so he can look at his profit and loss statements and determine what the incremental value of the incremental worker was and compare it to the incremental productivity as measured by his incremental profit. QED.

They are simply being paid what someone else in the business is being paid.

And the reason they are being paid at the burger joint pretty much what people popping corn at the movie theater are getting paid is that wages (just like profits) within any given line of work and for any given level of skills, tend to equalize on a free market. If the burger joint owner were offering $5/hour, and the movie theater owner were offering $12/hour, labor would tend to leave the burger joint and seek work at the movie theater. If the burger joint wanted to retain workers, it would have to match or exceed what the movie theater was paying. The movie theater, too, tries to read the future: how much additional corn can we pop and sell to customers if we hire one more worker at $XX/hour? It has to guess at first because it cannot foretell the future state of the market for movies; but it can know with 100% certainty "ex post" if its guess was correct.

It is a “class” thing, not an economic analysis thing.

On a free market, there's actually no such thing as a "class thing." All wages in a given industry for a given skill set tend toward uniformity; all RATES of profit, in ALL industries, tend toward uniformity.

You see, it isn’t that von Mises is stupid, or even wrong. Von Mises is simply irrelevant to what is going on.

Happy to hear that Mises was neither stupid nor wrong. You are both. See above. QED.

parsy, who hopes he is finally getting thru to you.

GoodDay, who hopes parsy doesn't quit his day job.

Now, some more detailed response while I have a few minutes:

“You haven’t given me theory (you’ve merely said that such arguments exist somewhere on the Web), and you haven’t given me empirical backup (you’ve merely claimed that it exists, somewhere).”

You must have just overlooked the two cut and paste jobs from wiki that I sent you. The empirical studies are provided by name and result. I can’t cut and paste from the studies themselves or FR will run out of disk space.

The theories of how minwages do not adversely affect the economy are also in those two posts.

Now, I was not being sarcastic when I last complimented you. Realizing the “post facto” nature of many economic decisions is a real breakthru after many of my discussions I have had in the past. Typically I keep getting econ 101 arguments thrown at me along with some Ayn Rand, von Miser, Hayek, and Freidman. (Milton, not Kinky) If you really want to blow your mind, let me tell you many businesses do not even engage in “post facto” analysis, at least not in any meaningful way. And, in fact, I have actually had clients who ignored my “post facto” analyses because it conflicted with their belief systems. Many capitalists really do believe numbers lie.

“Nothing is easier for businesses — especially a business in the private sector that operates according to ordinary notions of “profit” and “loss” — to know when they are operating at a profit and when they are operating a loss. The difficulty your common sense alludes to is usually overcome by the following very subtle procedure: The business in question adds up the money it took in during a certain period, and it then subtracts the money it spent on costs (including, of course, wages).”

I don’t want to break your spirit here, because you are getting closer and closer to the truth. But....yeah it really is hard sometimes because it is often difficult to track down the source of problems in the overall profit and cost structure. I have had many clients over the years who were convinced they had “cash flow” problems and I had difficulty explaining what they had was really a profit problem.

Profit problems can manifest themselves in numerous ways, some very sneaky, to wit: crap IRR’s, excessive costs, too low a cost, lower sales, higher sales on the wrong products, stupid management, faulty assumptions about the business, too many bad employees, too many good employees, too few good employees, family member employees, sex-partner employees, cost accounting failures, too much emphasis on lower prices, etc, etc, etc,

With all this, the extra dishwasher might be the problem, but the real problem could be elsewhere in the operation. The more complex the business, the harder it is to track down.

“Can the burger joint continue to operate if its cash flow is -$50/week every week? Careful. It’s a very, very tough question. It cannot be answered merely by reason, logic, and knowledge of economics. All sorts of very sophisticated empirical studies must be done to determine if a burger joint can stay open if it suffers negative cash flow every week.”

Yeah, actually it could. It depends on the amount of cash, the size of the negative cash flow, and the thinking behind the operation of the business. Example: Bob owns a building downtown. He thinks the building will sell several years in the future because the downtown area is undergoing a re-gentrification. It will cost him money to board up the building, hire security, pay property taxes, and too many boarded up buildings might derail the re-gentrification. o Bob, rather than lose $2,000 per month, operations a diner, offsets the business loss on his taxes, runs his personal vehicle thru the business, and has something for his girlfriend to do all day, and provides a place for him to sneak away from his wife and meet her.

The net cash loss, could also be a form of a savings account.

parsy, who will send more later.

They are simply being paid what someone else in the business is being paid.

Correct. Same goes for the price of other things beside labor: the price of a good; the price of a service; the price of money (interest); etc. Profit seeking by all market participants tends to make these things uniform.

Particularly since you now admit the value of the labor is not the issue, it is the business’s bottom line.

Labor has no value except what it contributes to a business’s bottom line. That’s a metaphysical fact recognized by economics. The business’s bottom line determines the value of the labor, not the other way around. When a business goes bankrupt, its labor force is worth zero. It becomes valuable again only in a free labor market where it can flow into some other business that’s actually earning a profit. That’s Econ-101 – the class you cut. If an unemployed worker moves to an island to live like Robinson Crusoe, he is no longer a “worker”: to survive, he must save like a capitalist and take risks like an entrepreneur. His food and shelter that he “pays” himself with at the end of each day is – by definition – profit, not wages. If he employs a native on the island to help hunt, cook, build, and cultivate, he pays the native islander out of that stock of profit – which by definition become the islander’s wages. That’s Econ 201 – the course you never took at all.

As for the law setting the minimum wage at a “more livable amount,” the only way to permanently raise wage rates for workers is to increase their productivity. The only way to increase their productivity is to invest more capital per worker so that his output increases. The only way to invest more capital per worker is to have more savings in an economy. The best way to have more savings in an economy is to have a stable money supply.

In the absence of all these things, the only way to insure that the poor worker has whatever it is you define as a “livable wage” without doing damage to the rest of the economy is for you personally to give it to him directly out of your own pocket. You – not “society” – should alter your pattern of consumption/saving in order to subsidize the worker directly. It’s called charity.

A secretary is going to make about $25,000 per year (for egs) not because of her individual value while her middle manager boss is going to make about $70,000 (for ega) because he is a middle manager boss and it has nothing to do with production.

The reason a business continues to pay a secretary $25K/year is that his services help the business in its overall productivity bring in an additional $25K+n/year. An individual business knows this is true because it knows what it’s paying the secretary and it knows what its revenues are. It’s a simple calculation. Everyone else knows that businesses must act this way because we all know that businesses are run by greedy, profit-seeking managers. Greedy, profit-seekers don’t like to run at a loss. We all agree they make errors in their calculations; we also all agree that they don’t like to make errors and would prefer not making them. Finally, we all agree that when businessmen make errors, they will take some sort of steps to try to correct them, and those steps will be based on personal context and local market conditions.

In fact, a good secretary is often the foundation of a well run business and of far more value, and much harder working, then the middle manager boss.

If typing and making appointments were truly “the foundation” of a business, secretaries would be in a good position to bid up their essential services to competing businesses to the point where their salaries almost equaled the additional value they add to the business. In fact, secretaries DO bid up their essential services to competing businesses, and in the judgment of the bidders (the employers in the competing businesses), a firm stands to increase its earnings by about $25K/year with the help of an “indispensable” secretary. Ergo, secretaries make about $25K/year, no more. We don’t hear about business concerns going bankrupt because a secretary decided to leave. For good reason.

parsy, who keeps trying

GoodDay, who agrees that parsy is extremely trying

Many capitalists really do believe numbers lie.

And many capitalists really do believe they get bad advice from their financial advisers. And many of them would be right.

But....yeah it really is hard sometimes because it is often difficult to track down the source of problems in the overall profit and cost structure.

It isn’t difficult at all . . . even if a scoundrel like you tries to convince his “clients” that their problems are so complex that they couldn’t possibly solve them without his “help.”

The problem is: a business is spending $1,000/week and bringing in $800. Solution? Cut $200 in costs. That’s not very difficult. Any business using internal accounting procedures (and all large businesses do) has no problem locating the source of the loss. The “source” is actually whatever is not worth $200/week in costs – this hardly requires a BS artist “advising” them on anything. Being both greedy and rational, a business will always sacrifice whatever is deemed to be of least importance – the “marginal” employee, item, machine, service, whatever. (Oh, and “rational” in this context means nothing more than “purposeful.”)

I have had many clients over the years who were convinced they had “cash flow” problems and I had difficulty explaining what they had was really a profit problem.

You had difficulty because clients believed you were BSing them. I don’t blame them. Any “financial adviser” like you who tells a client “I don’t know a thing about Econ 101, or Finance 101, or Accounting 101, or Anything 101: I use my common sense” will encounter difficulty in explaining anything to a client.

With all this, the extra dishwasher might be the problem, but the real problem could be elsewhere in the operation. The more complex the business, the harder it is to track down.

The more complex and bigger the business, the more likely it is to employ internal accounting procedures. It’s not that difficult to see what department or division or employee within a department or division is the source of the problem. The problem is not that it misidentifies the source; the problem is that there may be several sources that cannot be dealt with at the same time. This is a problem of internal politics in the business, and is not an economics issue.

Economics is far more straightforward than that. When making a choice among alternatives, each economic actor chooses to sacrifice the least important alternative. Under division of labor and monetary exchange “least important” means “least profitable.” Without division of labor and monetary exchange, “least important” means “least valuable” according to whatever standard of value the actor has. Under both scenarios, mistakes in choosing can be made. When that happens, the actor makes further choices to try to correct previous ones. The actor might rely on his own knowledge of local conditions to correct a previous decision, or he might decide to hire a witch doctor like parsy to “advise” him, or he might decide to howl at the moon. It’s all irrelevant from the standpoint of economics. Economics is concerned with the fact that at some point he must choose – and that choice, whether dictated by his own intellect, parsy’s incantations, or the moon, will reflect a value scale that has arisen at the moment he acts and will lead him to sacrifice whatever is of LEAST value in order to conserve what is of MOST value.

Except that in your fantasy scenario, you pretend that Bob will act rationally in regards to his building – he is speculating on the future state of affairs and acting accordingly because he hopes to profit in the future – yet you pretend that Bob will then act irrationally in the present when it comes to operating a diner. So I will assume that Bob has no knowledge of how to operate a diner, hires lousy help, serves lousy food, and has no customers. So the $2,000/month he would have lost boarding his building are lost operating a diner that no one comes to.

parsy, who will send more later.

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On Rereading “Atlas Shrugged”
Wednesday, July 08, 2009 12:53:37 PM • 130 of 132
parsifal to GoodDay
I was impressed with your cogent and thoughtful response. You are getting closer to enlightenment on minimum wages all the time.

So lets see what we agree on: First, most of these employment decisions are NOT based on any inherent labor value brought to the table.

Scratch a pro-serf, pro-slave BS-artist, find a Marxist.

Nothing has inherent value in the market. Not labor, not salt, not water, not diamonds. It has only exchange value and (with the use of money) a money-price. The exchange value and the money-price are determined by the subjective valuations of the marginal pairs of buyers.

Most of these businesses aren’t really doing any sort of “pre facto” economic analysis in regards to the labor costs. Most employers are in fact just sort of paying what everybody around them is paying.

That’s correct. And when you fall off a cliff, you are falling at the same rate of acceleration as all other objects. You might not be aware of the larger law that governs your action – only a physicist not falling off a cliff has the luxury of studying the problem in that way – but you are governed by the law none the less because the law of gravity is objective. Same with laws of economics. Consumers are unaware that they are determining the structure of production through their desires to buy “A” rather than “B” – only the economist who reflects on this and relates to other things going on in an economy has the luxury of studying the process in this way – but it’s true none the less. Employers and employees are unaware that they are bidding for each other and thereby setting wage rates together. But they are, because the Law of Demand is just like the Law of Gravity: objective. It works whether you are aware of it or not.

What this means is that minimum wages are set as the floor by gov’t and business are adjusting their profit structure in relation to the floor.

Just as businesses adjust their profit structure to anything that they cannot directly do anything about, including consumer tastes, the weather, and the local terrorist situation. So what.

Translated, Bob needs a dishwasher, so Bob hires one at the usually low minwage rate everybody else is paying.

Wrong. Bob is a small business owner with a narrow profit margin and a low rate of profit. He needs a dishwasher but he cannot afford to pay $7.50/hour for a job that, to him, is worth only $4.50/hour. So he does NOT hire anyone new, but instructs one of his other employees to perform the additional task of washing dishes. You clearly have never run a business (though that, apparently, has not prevented you from advising business people).

GoodDay, who is sorry parsy has left his day job.

Well, goodday, you’re getting closer and closer all the time. I am impressed by your common sense knowledge of how business really works. You’re not always right, but you are much closer than most. I say that with sincerity. Now, lets get to work on uncovering the implications of the facts.

“Labor has no value except what it contributes to a business’s bottom line. That’s a metaphysical fact recognized by economics. The business’s bottom line determines the value of the labor, not the other way around.”

Hallelujah!! Yes. This is one of the keys. But it is labor as a WHOLE within the business that makes the contribution. For example, take Bob’s Restaurant. It is the WHOLE workforce that makes the contribution, and it is not that one can take the dishwasher, out of that context, and then do some sort of voodoo economics to decide whether or not he is contributing $6.55 (minwage, I think) of value to the business each and ever hour he works. The dishwasher has a job to do and it is of value to the business and it is necessary. Assuming that the dishwasher can not reasonably be completely replaced by a machine, he is a vital cog in the labor machine.

One of the big problems with the typical anti-minwage person is that they attempt to isolate the lowest paid worker from the rest of the workforce.

Assuming then, that the dishwasher is necessary, and the wait staff, and the manager, and cooks, and the seater/greeter, and the bookkeeper at each of their various “skill-sets” ALL are what make the restaurant work, why then should the dishwasher not make enough money to pay for the basic necessities of life, such as rent, food, a car, utilities, health care, etc.

If prices were inelastic and could not be raised by the business, then what you have is an allocation of labor costs problem within the business. Other wages must be reduced to up the minwage worker’s wage. But prices are not usually all that inelastic. The price of a plate lunch might go from $4.59 to $4.99 to cover the increase. Or other costs could be cut.

The point is, what is being paid the minwage worker is not the result of an economic analysis to determine what his productive value is, it is more the economic realities of a particular business and what its bottom line is. So, if the gov’t sets the floor too low, any and all businesses will adjust to that floor. The reason why so many object to raising the floor is not that poor dishwashers will be priced out of the market, it is that either the higher paid workers will have to take a step down in wages or prices will be raised.

One of my main points is that if a business does not pay the minimum amount necessary to survive, society will pick up the costs in various ways, including taxes and deficit spending, not to mention the social costs.

Now, that being said, am I proposing that all workers make the same? Of course not. I am not silly, at least not unintentionally. There are always variations of skill and seniority and supply and demand that will differentiate workers in their wages. And some jobs really do not require a great deal of skill to perform, hence they will probably always gravitate toward the wage floor. But it is silly to try to pay a worker less than what it cost to live and then not expect that someone, somewhere is going to have to pick up the costs.

The military might provide you a good way to look at this. There are both skillsets and rank at play. A general is obviously someone who should make more money than a private straight out of basic. A pilot has more of an investment in him, than a guy in supply. But planes don’t fly without the guy in supply. They are all necessary and if the lower rung don’t make enough to live, the system starts to head toward collapse. The entire service suffers.

No one looks at the private or the supply guy and says well how much do you add in value to the system and let us pay you what some other country may pay its privates. It would be silly. These people are part of what it takes to run a military and if they are not treated with respect for what they do, and paid a livable salary, with benefits, they’ll walk or they’ll work less hard at what they do.The distribution ranges between top and bottom salaries in the military is much less than in private business but that is a whole ‘nother subject.

“As for the law setting the minimum wage at a “more livable amount,” the only way to permanently raise wage rates for workers is to increase their productivity. The only way to increase their productivity is to invest more capital per worker so that his output increases”

No it isn’t. That’s absurd. We’ve already agreed that it is bottom line facts that dictate wages, and that certain classes, oh excuse me, certain “skillsets” are going to be paid by their class, I mean skillset. (I’m sorry, I have to get used to Newspeak, here). wages can be redistributed in the internal cost matrix of a business, other costs can be cut, or prices could rise to reflect the real cost of doing business.

“The reason a business continues to pay a secretary $25K/year is that his services help the business in its overall productivity bring in an additional $25K+n/year.”

NONONONONONO! You are backsliding again. This is not an analysis anyone could possibly do. Too many variables by far. She/he is being paid hat wage because everyone else in that line of work is being paid that wage so everybody just continues it. Like you said, “class”, er skillset. Dang it, I keep using that word. I’ll try to be better in the future.

“The problem is: a business is spending $1,000/week and bringing in $800. Solution? Cut $200 in costs. That’s not very difficult. Any business using internal accounting procedures (and all large businesses do) has no problem locating the source of the loss.”

Oh, from your mouth to God’s ears! No, most businesses can’t really figure out the costs. Your solution, cut $200 in costs could, and probably is the wrong answer. Suppose the problem is a salesman who is not as productive as he needs to be. Suppose your product is flawed? You go and cut out the office coke machine and you do nothing to fix the problem. And back to costing, about 20 years ago there was this thing that came out called ABC, Activity Based Costing. I thought it was great and had a lot of promise, but it seemed to go nowhere. Much of it was counter-intuitive and required a different mindset on how to look at things. So no, I am not at all sure that a business can figure out what is wrong.

Plus, remember people run businesses. I cannot tell you how many times the main problem with a business is the owner/manager. Try to tell him he is overpaid, and his kid is overpaid and no the problem isn’t that his underpaid staff is overpaid, its that his underpaid staff feels disconnected from their work and any type of intelligent reward system. Oh, those are fun consults.

There is a huge body of literature out their on problems with entrepreneurs trying to be managers. You might find it interesting.

“yet you pretend that Bob will then act irrationally in the present when it comes to operating a diner.”

If Bob pays minwage to his dishwasher, Bob is acting rationally because he knows society is going to pick up the remaining costs. Society is acting irrationally because it permits the wage floor to be too low, thus subsidizing Bob, and his employees.

“What this means is that minimum wages are set as the floor by gov’t and business are adjusting their profit structure in relation to the floor.——Just as businesses adjust their profit structure to anything that they cannot directly do anything about, including consumer tastes, the weather, and the local terrorist situation. So what.”

So...raise the wage floor! That way we can all stop subsidizing businesses thru taxes and deficits. Most workers are already making enough to live, so its not like the whole economy needs a raise. Society will re-orient itself. Some from higher wages going down, some from price increases.

But look at the benefits. People will have an incentive to go to work. Now, IMHO, there is little economic benefit to some people getting off welfare, particularly in short run. If you are an unskilled person, you are going to be paid at the lower tier of wages, which right now doesn’t even provide enough for you to live on. I have two clients, one with AIDS, who want to go to work but cannot risk the loss of medical benefits. This is absurd. But, neither could ever make enough to pay their overwhelming medical bills. One even had a CPA license, but can not risk losing benefits for health. This person can not economically go to work, even with a college degree and a marketable skill, and make enough to cover medical bills. Because of health issues, this person could probably only work a short week anyway, maybe 20 hours tops, but simply can not do so without going backwards.

I know other people who have children. With the minwage being what it is, the wife can often not afford to work. By the time daycare is paid, plus automotive costs, they might bring in $1 per hour net.

Same with the working poor. I love the “idea” of people on welfare being forced to seek a job and get off the dole. Why do I want to pay some jerk to sit home and watch TV or play video games. But in all honesty, if that person obtains work at some low crap wage, that doesn’t begin to compensate at a livable amount, I really can’t blame them for wanting to hang onto gov’t housing, health benefits, and food stamps.

And,frankly, you agree with me whether you know it or not. Let me quote YOU:

“Economics is far more straightforward than that. When making a choice among alternatives, each economic actor chooses to sacrifice the least important alternative. Under division of labor and monetary exchange “least important” means “least profitable.”

This holds true for all income classes. Many welfare bums have chosen to sacrifice the least profitable alternative, “work at a less than livable amount” , for their dignity and self-respect. But what the heck, the rest of us can get a $1.00 hamburger out of the deal.

parsy, who thinks you’re almost there.

Hallelujah!! Yes. This is one of the keys. But it is labor as a WHOLE within the business that makes the contribution.

Wrong. It is individuals who make the contribution. “Labor” is no more monolothic to a firm than is “Land”, “Management”, or “Capital”. Any firm can tell easily which piece of land contributes more or less to the enterprise. Same for the other factors of production.
At no time have I ever written that business dictates the height of wages. The bottom line creates the fact of wages, and the fact that labor has any value at all. It doesn’t dictate the amount of the wage any more than it dictates the amount of the price for the product.

For example, take Bob’s Restaurant. It is the WHOLE workforce that makes the contribution,

Wrong. It is individuals who make specific contributions worth specific things to employers. If the firm makes use of internal accounting it can spot which factors contribute to profit and which cause loss. Without internal accounting, a small business will still make decisions based on the valuations of the employers: “I prefer A to B.” Are errors made? Yes. Are businesses small and large made aware of their errors? Yes: if the choice was correct, they profit; if incorrect, they suffer loss. Very simple.

and it is not that one can take the dishwasher, out of that context, and then do some sort of voodoo economics to decide whether or not he is contributing $6.55 (minwage, I think) of value to the business each and ever hour he works.
Wrong. Nothing is simpler for Burger King to determine if the sale of 10 additional burgers/hour (the marginal revenue) will more than pay for the hiring of one additional employee at $6.55/hour (the marginal employee).

The dishwasher has a job to do and it is of value to the business and it is necessary.

Nothing is necessary except for the business to earn a profit. It could easily dispense with the dishwasher and use all plastic disposable utensils, chopsticks, and paper plates.

Laws of economics are just like laws of nature: can’t get around them even if you try. If you force employers to pay employees higher wages than they would otherwise pay, they will take measures to increase their profits by increasing worker productivity: they will cut their break time; they will require workers to purchase and maintain their own uniforms; they will not give them discounts on meals; they may require work on weekends or longer hours during the week; etc.

Wrong. The “minimum amount necessary to survive” is no more than a cave, a bearskin, and a hunk of raw meat. That’s it. Oh, so now the lowest paid worker demands that he get an iPod, a BlackBerry, cable TV, leisure time off to spend with his girlfriend, a car, gas, car insurance, health insurance, entertainment, and paid vacations because he thinks “I’m a dishwasher. I do an important job. Without me, this joint would collapse. They need me.” If they needed him, they’d be paying him a huge salary and not a small hourly wage.

Better solution: the dishwasher is a kid. That means he most likely lives at home where mommy and dada — not “society” — “pick up the deficit” and pay for the roof over his head and his other “necessities.” PROBLEM SOLVED. If the kiddie wants to pay his own rent, he does what all kids do when they don’t earn enough to pay rent on their own: they share with 5 other kids. PROBLEM SOLVED. See? When not made a burden to the rest of society, people — even kids — suddenly become very resourceful.

The military might provide you a good way to look at this.

Wrong. The military is not a private company competing against other private companies in the private sector for the consumers’ money. It’s completely tax subsidized and its purpose is defense and to fight and win wars. It’s purpose is not to earn a profit.

No it isn’t. That’s absurd.

Wrong. Basic economics. Man with plow on 30 acre farm grow small number of crops and sell quick before they rot. Man with combine, tractors, and chemical fertilizer on 3,000 acre farm grow mucho crops and with refrigeration and trucks, he can extend the selling time. Man #2 makes more money than Man #1 because of all the capital — the tools — at his disposal. He doesn’t earn more money because the government stepped in and imposed a minimum wage. Same applies to the industrial worker. Highly unlikely that a worker can make a living tightening a bolt on a car. An assembly line worker tightening lots of bolts on lots of cars can make a living even without union wage rates. The difference between the first guy and the second is that someone — entrepreneurs and capitalists — have invested lots of machines in his labor. The second guy is more productive than the first. Higher productivity leads to greater supply; greater supply leads to lower prices. Lower prices constitute the major portion of his higher wages. It’s not a higher money-wage (that’s almost always due to inflation). His higher wage is manifested in greater purchasing power due to declining prices.

We’ve already agreed that it is bottom line facts that dictate wages,

Wrong. See above. I never said that the bottom line “dictates” wages. The fact that businesses wish to earn profits is the reason labor has value — just as the fact that consumers want things is the reason that a business has value. The wage RATE is determined by the supply of labor and its demand. The amount of the money-wage — the nominal wage — also includes the quantity of money in the economy (inflationary economies have higher money-wages, but lower purchasing power because the extra money erodes the value of each money unit).

GoodDay, who suspects that Sonia Sotomayor smiles fondly on parsy.

I still have faith in you.

“Nothing is necessary except for the business to earn a profit. It could easily dispense with the dishwasher and use all plastic disposable utensils, chopsticks, and paper plates.”

Yes, and I guess they could just slop the food onto the table and let their guests lap it up like dogs, but that isn’t a realistic option. There is a Latin term for this, Reductio de Absurdio, or something like that. It has been a while since I took Absurdities and Inanities 101. I got an A as I remember. It was an elective.

“Laws of economics are just like laws of nature: can’t get around them even if you try. “

YES! You are catching on. The less than subsistence wage employee is going to cost someone, somewhere, probably the tax-payer. That is why some people think Wal Mart is a corporate welfare recipient.

“If you force employers to pay employees higher wages than they would otherwise pay, they will take measures to increase their profits by increasing worker productivity:”

Yeah, they might like uh uh uh , RAISE PRICES! Where do you think most, or at least a lot of “productivty” comes from. Most productivity is measured by revenue/no. of employees.

“Wrong. The “minimum amount necessary to survive” is no more than a cave, a bearskin, and a hunk of raw meat. That’s it. “

I am so glad that you have actually set forth the official GOP platform on what is meant by being a kinder and gentler party. The addition of the bearskin will be greatly appreciated by those poor folks in colder climes.

Seriously, though, you are back in that reductio whatever mode. Assume minwage gets to $10 per hour, take home would be about $350 per week. About $1,400 per month. Rent and utilities come to about $600, even for a trailer. Food, about $200, at least, and that’s eating a lot of Armor Treet and potted meat. Cell phone about $50 per month. Car, about $200. Car insurance about $75. Fuel, another $150. That leaves about $125 per month for car repairs, clothes, medical care, day care if you have a child, furniture, etc. Like we say in Arkansas, “they ain’t exactly cuttin’ a fat hog in the *ss, are they.”

“Better solution: the dishwasher is a kid. That means he most likely lives at home where mommy and dada — not “society” — “pick up the deficit” and pay for the roof over his head and his other “necessities.” PROBLEM SOLVED.”

Being the honest little freeper that I am, yeah you’re right. In fact, much minwage is to kids, and much of the argument is moot because maw and paw do pick up the difference. But not all minwage is kids. And minwages sorta affect the next tier of “low wages” where there are plenty of adults.

Some countries have a tiered minwage where kids can be paid less. It seems my first job was like that. I think I made $1.36 per hour because of my age.

Take those numbers above at $10/hr. Hard to live, but do-able. Now take $8/hr which $1.45 higher than minwage. Bring home pay about $290 per week. Rent, utilities,food, and its gone. So, the worker gets food stamps, rent subsidies, medicare/medicaid, other welfare. We pay.

“The wage RATE is determined by the supply of labor and its demand.”......and the legally set minimum wage!

The military might provide you a good way to look at this.

“Wrong. The military is not a private company competing against other private companies in the private sector for the consumers’ money. It’s completely tax subsidized and its purpose is defense and to fight and win wars. It’s purpose is not to earn a profit. “

True, about the profit.....but it does compete....against other militaries! That is why FedEx used to give copies of the Art of War to its executives and managers. Read Leadership Tactics of Attilla the Hun. When the lower ranks in the service feel a part of the whole, they fight better and are stronger. Our commanders are taught to go into battle with the troops. That is one reason why we went thru Iraqi Army like a hot knife thru butter. Iraqi officers cut and ran.

Our society is like that. When the lower classes have enough to survive and feel like the system is not stacked against them, we have a stronger nation. We don’t have to all be equal, but we all do need to feel that the system is fair.

Why do you think slavery wasn’t working in the South before the War of Northern Aggression? It sure ought to have. Durn near free labor. Because of the law of economics you cited above. By the time of the war, slavery was changing its face. Many slaves worked on a percentage basis, like sharecroppers. Only way to give them any incentive to really work. Believe it or not, you couldn’t beat them enough to make them efficient. Like that old country song:

Little bee suck the flower.
Big bee get the honey.
Black man plant the cotton.
White man get the money.
O take me back to Tulsa, etc.

When a man works 40 hours a week and don’t make enough to even begin to pay bills, while another class of worker sits around in an air conditioned office playing solitaire several hours a day, and is driving a Cadillac, you’re setting our country up for a fall.

Oh, BTW, my business strategy class was taught by a Captain in Air Force Intelligence. I got an A.

parsy, who has been so busy teaching Real Economics 101 to you, he hasn’t had time to read up much on Sonia, except that she is a wise Latino woman. What gives?

Oh, BTW, my business strategy class was taught by a Captain in Air Force Intelligence.

Demand your money back. He taught you nothing.

I got an A.

And he graded on a curve.

A much better course on the economics of the minimum wage:

"http://europac.net/externalframeset.asp?from=home&id=16714&type=schiff

July 10, 2009

Minimum Wage, Maximum Stupidity

By Peter Schiff

In a free market, demand is always a function of price: the higher the price, the lower the demand. What may surprise most politicians is that these rules apply equally to both prices and wages. When employers evaluate their labor and capital needs, cost is a primary factor. When the cost of hiring low-skilled workers moves higher, jobs are lost. Despite this, minimum wage hikes, like the one set to take effect later this month, are always seen as an act of governmental benevolence. Nothing could be further from the truth.

When confronted with a clogged drain, most of us will call several plumbers and hire the one who quotes us the lowest price. If all the quotes are too high, most of us will grab some Drano and a wrench, and have at it. Labor markets work the same way. Before bringing on another worker, an employer must be convinced that the added productivity will exceed the added cost (this includes not just wages, but all payroll taxes and other benefits.) So if an unskilled worker is capable of delivering only $6 per hour of increased productivity, such an individual is legally unemployable with a minimum wage of $7.25 per hour.

Low-skilled workers must compete for employers’ dollars with both skilled workers and capital. For example, if a skilled worker can do a job for $14 per hour that two unskilled workers can do for $6.50 per hour each, then it makes economic sense for the employer to go with the unskilled labor. Increase the minimum wage to $7.25 per hour and the unskilled workers are priced out of their jobs. This dynamic is precisely why labor unions are such big supporters of minimum wage laws. Even though none of their members earn the minimum wage, the law helps protect their members from having to compete with lower-skilled workers.

Employers also have the choice of whether to employ people or machines. For example, an employer can hire a receptionist or invest in an automated answering system. The next time you are screaming obscenities into the phone as you try to have a conversation with a computer, you know what to blame for your frustration.

There are numerous other examples of employers substituting capital for labor simply because the minimum wage has made low-skilled workers uncompetitive. For example, handcarts have replaced skycaps at airports. The main reason fast-food restaurants use paper plates and plastic utensils is to avoid having to hire dishwashers.

As a result, many low-skilled jobs that used to be the first rung on the employment ladder have been priced out of the market. Can you remember the last time an usher showed you to your seat in a dark movie theater? When was the last time someone other than the cashier not only bagged your groceries, but also loaded them into your car? By the way, it won’t be long before the cashiers themselves are priced out of the market, replaced by automated scanners, leaving you to bag your purchases with no help whatsoever.

The disappearance of these jobs has broader economic and societal consequences. First jobs are a means to improve skills so that low skilled workers can offer greater productivity to current or future employers. As their skills grow, so does their ability to earn higher wages. However, remove the bottom rung from the employment ladder and many never have a chance to climb it.

So the next time you are pumping your own gas in the rain, do not just think about the teenager who could have been pumping it for you, think about the auto mechanic he could have become – had the minimum wage not denied him a job. Many auto mechanics used to learn their trade while working as pump jockeys. Between fill-ups, checking tire pressure, and washing windows, they would spend a lot of time helping – and learning from – the mechanics.

Because the minimum wage prevents so many young people (including a disproportionate number of minorities) from getting entry-level jobs, they never develop the skills necessary to command higher paying jobs. As a result, many turn to crime, while others subsist on government aid. Supporters of the minimum wage argue that it is impossible to support a family on the minimum wage. While that is true, it is completely irrelevant, as minimum wage jobs are not designed to support families. In fact, many people earning the minimum wage are themselves supported by their parents.

The way it is supposed to work is that people do not choose to start families until they can earn enough to support them. Lower wage jobs enable workers to eventually acquire the skills necessary to earn wages high enough to support a family. Does anyone really think a kid with a paper route should earn a wage high enough to support a family?

The only way to increase wages is to increase worker productivity. If wages could be raised simply by government mandate, we could set the minimum wage at $100 per hour and solve all problems. It should be clear that, at that level, most of the population would lose their jobs, and the remaining labor would be so expensive that prices for goods and services would skyrocket. That’s the exact burden the minimum wage places on our poor and low-skilled workers, and ultimately every American consumer.

Since our leaders cannot even grasp this simple economic concept, how can we expect them to deal with the more complicated problems that currently confront us?"

GoodDay, who has the pleasure of telling parsy for the second time: QED.

It was a very well written piece. But again, not entirely relevant. To wit:

“When employers evaluate their labor and capital needs, cost is a primary factor. When the cost of hiring low-skilled workers moves higher, jobs are lost.”

This is a truism of any job, low paid or higher paid. If a garage can replace a diagnostic mechanic with a machine that can be run by a monkey, it will probably do so. In the meantime, the mechanic will be paid a wage. He will get raises from time to time and an increase in benefits. That is because he is doing a job which needs to be done.

The same is true for the usher at the movie theater. What could a movie theater afford? $1 per hour. Theaters are sellers of popcorn and cokes, not movie theaters. Hollywood takes too big a piece of their pie. But it needs some employees so the ticket price will just have to go up until it is enough to pay the wages.

You are still missing the point. Why should a business pay an employee in our country less than it takes to survive? The minwage floor is a standard, just like mandate of worker’s comp insurance. Just like safety regulations. A bar can hold 400 people but only 250 safely. Does it cost the bar income? Sure. They may pack the place for years and never have a fire. But you live in a civilization and there are rules in your business.

The same with prohibitions against false and misleading advertising. Does it cost a business money? Sure. Who cares. Businesses don’t just get to do whatever they want without regard to the consequences in a well organized society.

The same holds true with the wage floor. If a business needs an employee, there is a certain minimum amount that needs to be paid to not be exploitive. And without legally established floors, merchants in an area would take advantage and screw workers by collusion.

These are not hard concepts to master. In one respect, I can not believe that it is the 21st century and that I am actually trying to convince an intelligent person that setting a livable wage floor is a good thing.

One thing that is inelastic is time. each of us, rich or poor gets 168 hours in their week. If we work 40 hours, for someone else, we should be able to survive in some marginal fashion. If a business is not able to pay that minimal amount to a worker, then it does not need to be in business. Obviously, its prices are set too low or it is not as efficient as its competitors.

And another thing,have you noticed that these increases in pay only seem to get the bums rush at the low end of the spectrum? We can’t give the dishwasher a 70 cent per hour raise (or $28/week) but other workers in a business regularly get raises in that amount and more and it has little to do with productivity. As often or not, it is seniority.

A business does not have to hire an employee, but if it does, it should be prepared to pay the legal minimum wage.

parsy, who says Caesar provinciam est.

And another thing,have you noticed that these increases in pay only seem to get the bums rush at the low end of the spectrum?

That's because business voluntarily increase someone's pay higher up on the spectrum because they feel the employee deserves it. That process doesn't go on forever. What it means economically is that the employee's services were originally undervalued and the employee waits out a period of time to get the real wage -- the higher wage. This is obviously different from the busboy or carpet cleaner who contributes little to actual productivity.

As often or not, it is seniority.

That's correct. The senior employee was getting less than the true market value of his contribution to the firm and had to work up to it by proving himself over a period time. Had the senior employee demanded to be paid the higher salary immediately upon applying for the job, he would not have been hired at all. Same for the busboy and the carpet cleaner: they start low and have a chance to move up to higher wages and salaries by proving themselves . . . the ones who actually get hired, of course. The ones you've made unemployable because you force them to demand in the present the wage they might be getting a year or two down the road don't "rise through the ranks" of anything; in your scenario, they meander endlessly through the dole system.

A business does not have to hire an employee, but if it does, it should be prepared to pay the legal minimum wage.

A business has no choice except to pay the minimum wage whether it is prepared to or not. That's a big incentive not to hire in the first place. What it certainly is prepared to do is cut other non-money-wage benefits in order to increase the worker's productivity and cut its own costs: it will reduce the worker's breaktime, it will make him purchase his own uniform (if required by the job) and care for it at his own expense; it will eliminate discounts for meals; it will require more non-job-related chores...and, most importantly (the point you continue to ignore and which was the gist of Schiff's article) it will eliminate the chances of additional workers being hired. Your minimum wage law made them unemployable. Now you will advocate a dole system to see to it that the unemployable get a "minimum survival income" whether they work or not.

Of course, as economist George Reisman points out in this interview, the unemployment caused by minimum wage laws is worsened when combined with pro-union legislation. When the carpenter's union, for example, forces a wage increase for its members, fewer carpenter's can be hired; those skilled carpenter's who now cannot find jobs move down the economic ladder to the TOP of the next highest rung; that rung cannot absorb all the new workers, so it forces out of work those at the BOTTOM of the rung; those unemployed workers cannot find work except by moving down to the TOP of a still lower rung; but the same repeats itself in that area -- it's "trickle down unemployment." It continues to trickle down all the way to the lowest rung -- the burger flippers, the carpet cleaners, the busboys, etc. And here, where there is a minimum wage, the least skilled of the least skilled will be forced out for good; now you have "structural unemployment", i.e., permanent, chronic unemployment. Reisman points out that if you wish to remove the downward pressure on employment, you need to abolish both the minimum wage and pro-union legislation.

http://www.youtube.com/watch?v=4KT0JZhTIcg

GoodDay, who strongly urges parsy to sue his former "business strategy" teacher for fraudulently impersonating an economics instructor.

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