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Minimum wage and power imbalance
Purist capitalist economists make a mistake similar to purist socialist economists. Socialists assume that in the absence of other forces, humans always choose altruism over self-interest. Capitalists assume, or rather elevate, self-interest to be the greatest virtue. But humans are not one-dimensional.
With that introduction, chapter 1 of Principles bothers me. Saifedean implies that a law requiring minimum wage is evil. This is right, and also wrong.
In a capitalist system, monopolies and cartels are forbidden. The monopolist has overwhelming power relative to the neo entrepreneur. This stifles competition and always leads to a bad end.
When a boss sexually harasses their employee, they often get away with it because the employee fears loss of job and support. The employee makes the self-interested decision that submitting to the boss is more profitable than fighting them. And yet, sexual harassment is evil. Why? Because most people have empathy with the employee, and will even make (at least small) sacrifices to save the employee and punish the boss. That is altruism.
The consistent theme is that it is evil to exploit a power imbalance for self gain. No matter how self-interested humans may be, they will not stand for unfairness, i.e. exploitation of unequal power.
In negotiations between an employer and a single employee over wages, there is an obvious power imbalance. Exploiting that power, the boss can drive a person into abject poverty, even though they work 40 hour a week. Most people consider that unfair. It is unacceptable that we would allow employers to exploit their greater power in pure self-interest. A minimum wage is society’s response to this unfairness.
Now, you can argue about means. Minimum wage may not be the right solution, but the economist cannot do away with it unless they present _some_ solution to this problem. Unless and until humans devise a better response, moral imperative requires that we learn to live with minimum wage.
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13 Replies
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To clarify. “…an obvious power imbalance…” I would add, “When applicant supply greatly dominates the demand for employees…”
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That video is absolutely awesome! Wish I knew Portuguese, but the meaning is clear.
And I don’t disagree with the message, but you are kind of evading my point. I said that minimum wage may not be the best solution, clearly it has drawbacks, but that doesn’t change the negative effects of power imbalance in the employer / employee relationship. It isn’t enough to simply provide an argument for why minimum wage is bad, because some of the effects of minimum wage are good.
I am shooting for a deeper conversation. About economic policies and unfairness that is inherent in the system.
Also, I believe you are ignoring my example about sexual harassment. I don’t think you are condoning sexual harassment for the betterment of society. Somewhere, there must be a line between acceptable and unacceptable abuses of power imbalance. Is total neglect of employer abuse of power really the best solution?
Thanks for engaging. That video makes a good point and is so cool!
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Minimum wage is bad because it hurts unskilled workers. It forces them to get a job illegally. As a young unexperienced worker I would totally work for pennies in order to learn skills but employers have no incentive to hire me. Greetings from Argentina, commonly known as USSR, the sequel
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Thank you Gonzalo Coelho. I’m glad you restarted this conversation.
My response is that you make an excellent point. Minimum wage causes harm to inexperienced workers.
My point is that there are always positive and negative outcomes to any economic policy.
In his writing, Saifedean explains how fiat_distorts_the_labor_market. His conclusion is that the high unemployment we know would not exist in an economy with hard money.
I hope someday we will have hard money. But for now, lots of people suffer avoidable unemployment thanks to the boom-bust cycle of inflationary fiat. Especially the poor. Until we have a better base economy, inserting just one small part of Austrian economics into a fiat economy can do more harm than good.
Pragmatically, we must develop policies that are in balance with the _current_ state of the economy, not with some utopian vision of a perfect world.
Unnecessary unemployment hurts the poor. Minimum wage hurts the inexperienced. Can we find a policy that reduces harm both to the poor and the inexperienced?
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If I am being honest, I didn’t feel like addressing your point about altruism, maybe because I’m lazy. Probably because I don’t have a good answer. Having conceded that, I still can’t see the benefit in a minimum wage policy. As you said, it generates unnecesary unemployment and it’s not like it’s helping someone get a better salary. I think we disagree on this last part.
From my understanding incentives trump any kind of signed piece of paper and these “forced” wage increases would only apply to people productive enough to deserve a raise. In my view this kind of law can either be harmful for unexperienced workers or totally irrelevant depending on the minimum defined.
https://mises.org/library/middle-road-leads-socialism Maybe this can provide a different angle to which address the problem that you posed (not living in a economic utopia and wanting to improve it following austrian economics).
If you don’t mind, I am going to reply to old threads that I find interesting haha. I joined not so long ago and I want to improve my understading and my english.
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Hi Gonzalo
I don’t have much to add. Thanks for the link.
I would encourage you to reply to old comments. We are just getting started and there are few people willing to make the effort. Conversations will be helpful to all of us.-
Hallo Gerald,
I am also new here, joined just yesterday after reading Bitcoin standard and getting familiar with some of Seifs ideas and podcast, which caught my attention.
I havent red or gone through the courses yet, but will do soon As I am interested in the Austrian thinking and like some of the ideas.
I am educated in economics and work in board member position responsible for sales in one international company in Slovakia.
I always thought that minimum wage was unnecessary to say at least up to quite harmful in the extreme. I can see that market can solve thos quite easly with the balancing of supply and demand.
We are hiring a lot of peaple and we see how we can influence it and how the expectations and laber offer shifts with the conditions on the marker (but we are not offering minimal wage but the dynamics are similar).
As I said I didnt go through the courses and the Austrian position but where I right now see the weaknes of the free markets is that they balance everything but it takes time which for some market paricipants, particularly the waker ones might mean the difference of life or death.
Of course the discussion get a lot more complicating with the addition of political order into the discussion but lets abstract from it for now.
Take care
Michal
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Hi Michal
Thanks for the post. I’m glad that you can at least see the problem I’m talking about. This isn’t a perfect world and idealistic solutions (the perfect) can be the enemy of pragmatic solutions (the good enough).Logic tells us how a truly free market would operate, and if the market were truly free, then minimum wage would be harmful. Unfortunately, the real market is never entirely free. And in this world of fiat currency and government manipulation, the market is not at all “free.” I believe Saif would agree with this point. He even makes this point, explicitly in his book on the fiat standard.
The short term solution for the best of society has no obvious answer. I don’t know if a minimum wage would do more good than harm, but doing nothing will be worse. Waiting, maybe forever, for the skewed market to fix everything is not the best thing for society right now.
My opinion is that minimum wage will be a useful stop-gap solution in the short term. If anyone can think of a way to tweak minimum wage to protect the inexperienced, or offer an entirely different solution, I’m very open to suggestion.
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A thing that may not seem nice but still worth considering is that the only reason such bad policies can be sustained this long is the half-ass solutions governments keep introducing to prolong the suffering once people are about to revolt. So may be it is better to let the system deteriorate till it collapses so we even have a chance to change it. Arguing that the near term limited benefits (by introducing minimum wage) outweigh the long term continuous harms isn’t logical to me.
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You make a very persuasive argument. I have to think about it more, but I am almost convinced. You’re right, the only way we’ll get change is through a grass-roots movement that has a high impact.
OK – I agree with your argument with no reservations.
Thank you. I feel like I really learned something!
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This reminds me of Emerson’s quote <em style=”font-family: inherit; font-size: inherit;”>“Cause and effect, means and ends, seed and fruit cannot be severed; for the effect already blooms in the cause, the end preexists in the means, the fruit in the seed”
In the ideal situation, is there a power imbalance between employer and employee? The employer, as the person with the capital, sets the amount of work that needs to be done and the rate he will pay to do it. The employee has the sovereignty to take the offer, deny it, or negotiate a different compensation arrangement.
The employer has no power over the employee’s labor. He cannot demand he work for less than that worker is willing to receive for his work. That is slavery.
Likewise, the employee has no power over the employer’s capital. He cannot demand he is paid more than the employer is willing to pay for the work done.
When the state forces that employer to pay any specific wage, the state is stealing that person’s property and giving it to another person.
Regardless of what theoretical good may come from that employee earning a higher wage, the fact is that they got that wage through theft by force (not that the workers themselves are stealing). All theft is evil, and as Emerson said, you can’t severe cause and effect.
I also think that sometimes we try and peg behaviors into categories of self-interest vs. altruistic, but we know that human action is much more complex and dynamic.
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Zaher Kamel
Not to fault your logic. I wanted to bring up another ramification about letting people suffer until they rise up and demand change. Perhaps this is the most merciful way.
Unfortunately, it is very likely that when the downtrodden rise up, they will not ask for hard money or government/business living within their means. A much more likely outcome is an increase in populist sentiment tending toward socialist solutions. This is another kind of death spiral, and I am confident that this is exactly what will happen in the USA. (Where I live.)
If we don’t end up with another fascist president, the next likely option is a hard left socialist president.
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Having said that my question is this. Can we (cognosenti, ha, ha!) advocate for a third way that leads to a softer landing?
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