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Pseudo-demand, Pseudo-supply

Xerographica

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In a recent post ... I touched on the problem of minimum wages. Thought I'd take the opportunity to explore the problem in more depth.

Basically, minimum wages are false values. They do not accurately reflect society's true preferences. As I've said before, in economics "preferences" are the same as "demand". So false values/preferences are the same thing as a false demand. Pseudo-demand will always result in pseudo-supply. Minimum wages (psuedo-demand) prevent us from maximizing the value we derive from our limited resources.

Anybody a fan of Monty Python? Here's a fun clip to illustrate the concept of false values...


If somebody asks you what your favorite color is...why lie? Why risk being cast into the gorge of eternal peril? In other words, why risk having to wear an orange sweater when orange is your least favorite color? If your favorite color is green, then clearly there's going to be a value disparity between wearing a green sweater and wearing an orange sweater.

When we input false values into the impossibly complex equation which determines how society's limited resources are allocated...it's a given that the output will not be accurate. It will be less valuable than the output would have been if true values had been inputted. The size of the value disparity will depend on how false the inputted values were.

In computing, this is known as garbage in, garbage out. It's equally relevant to economics...pseudo-demand, pseudo-supply.

Just like it would be detrimental to lie about how much you value something...it would also be detrimental to have your true values ignored. Here's a funny story from the bible that perfectly illustrates the problem with command economies (our public sector)...

Genesis 29

1 Then Jacob went on his journey, and came into the land of the people of the east.
2 And he looked, and behold a well in the field, and, lo, there were three flocks of sheep lying by it; for out of that well they watered the flocks: and a great stone was upon the well's mouth.
3 And thither were all the flocks gathered: and they rolled the stone from the well's mouth, and watered the sheep, and put the stone again upon the well's mouth in his place.
4 And Jacob said unto them, My brethren, whence be ye? And they said, Of Haran are we.
5 And he said unto them, Know ye Laban the son of Nahor? And they said, We know him.
6 And he said unto them, Is he well? And they said, He is well: and, behold, Rachel his daughter cometh with the sheep.
7 And he said, Lo, it is yet high day, neither is it time that the cattle should be gathered together: water ye the sheep, and go and feed them.
8 And they said, We cannot, until all the flocks be gathered together, and till they roll the stone from the well's mouth; then we water the sheep.
9 And while he yet spake with them, Rachel came with her father's sheep; for she kept them.
10 And it came to pass, when Jacob saw Rachel the daughter of Laban his mother's brother, and the sheep of Laban his mother's brother, that Jacob went near, and rolled the stone from the well's mouth, and watered the flock of Laban his mother's brother.
11 And Jacob kissed Rachel, and lifted up his voice, and wept.
12 And Jacob told Rachel that he was her father's brother, and that he was Rebekah's son: and she ran and told her father.
13 And it came to pass, when Laban heard the tidings of Jacob his sister's son, that he ran to meet him, and embraced him, and kissed him, and brought him to his house. And he told Laban all these things.
14 And Laban said to him, Surely thou art my bone and my flesh. And he abode with him the space of a month.
15 And Laban said unto Jacob, Because thou art my brother, shouldest thou therefore serve me for nought? tell me, what shall thy wages be?
16 And Laban had two daughters: the name of the elder was Leah, and the name of the younger was Rachel.
17 Leah was tender eyed; but Rachel was beautiful and well favoured.
18 And Jacob loved Rachel; and said, I will serve thee seven years for Rachel thy younger daughter.
19 And Laban said, It is better that I give her to thee, than that I should give her to another man: abide with me.
20 And Jacob served seven years for Rachel; and they seemed unto him but a few days, for the love he had to her.
21 And Jacob said unto Laban, Give me my wife, for my days are fulfilled, that I may go in unto her.
22 And Laban gathered together all the men of the place, and made a feast.
23 And it came to pass in the evening, that he took Leah his daughter, and brought her to him; and he went in unto her.
24 And Laban gave unto his daughter Leah Zilpah his maid for an handmaid.
25 And it came to pass, that in the morning, behold, it was Leah: and he said to Laban, What is this thou hast done unto me? did not I serve with thee for Rachel? wherefore then hast thou beguiled me?

LOL...that's a really funny, but messed up story. It's interesting that Jacob only realized the trickery the morning after. Do you think that you would have realized that you were sleeping with the wrong sister? Maybe it was really dark...and/or Jacob must have been really drunk...and Leah didn't say anything before, during or after sex.

Imagine Jacob went to a drive through restaurant. Except, the menu consisted of women (Rachel, Leah, Zilpah, etc.) rather than food. Jacob ordered Rachel, drove up to the cashier and paid 7 years of his life. Unfortunately, it was only after he consumed his "meal" that he realized he had been given the wrong woman.

Command economies are non-sequitur economies. The conclusion (Leah) did not follow from the premise (Jacob's preferences). As a result, value was destroyed.
Pseudo-demand, pseudo-supply.

How much does our society truly value unskilled labor? We really don't know. And that's a problem. If students don't know how much society truly values unskilled labor...then how can they possibly make an informed decision regarding how much effort/time/money to invest in acquiring skills? Why would you lie to your son or daughter? Why would you want to incentivize them to drop out of school? If we say that we value unskilled labor more than we really do...then we're increasing the incentive for unskilled people to immigrate to America. Why lie to poor people in foreign countries? If wages don't truly reflect the demand, then the supply won't truly reflect our preferences.

The immediate consequences of living/minimum wages might be beneficial...but the subsequent consequences are always detrimental.

False values prevent resources from being efficiently allocated. If you really don't believe me...then the next time you're at a bar/club...lie about your sexual preferences. Let me know how it goes.
 

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"How this all helps capitalism

Capitalism requires sales for it to be sustainable, and a poor class that has the ability to purchase things helps to keep that sustainability. If minimum wages were to increase it would effect the purchasing power of 30 million Americans, and if that wage was raised to $15 an hour it would inject $450 billion into the economy, and not just once, but every year. And this sector of the economy is one in which spends a large majority of their income. This increase in sales for businesses would increase hiring and create more competition with more businesses opening up to capture market share."

Minimum Wage Increases are a Necessity for Capitalism to Work | Heretical Druthers

"Basically, minimum wages are false values. They do not accurately reflect society's true preferences."

Unfortunately you are equating society with those that coerce workers into lower wages. That isn't society, it is a class of people who hold capital leverage over the labor class in any wage negotiations. It is incredibly coercive to do this and actually goes against the coercing tenet of libertarianism.
 

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When we input false values into the impossibly complex equation which determines how society's limited resources are allocated...it's a given that the output will not be accurate. It will be less valuable than the output would have been if true values had been inputted. The size of the value disparity will depend on how false the inputted values were..

The problem is your calibrating "values" in a skewed environment. One which has too much money and the influence that goes along with it in the hands of too few people. All you have to do is to continue to put more money into the hands of even fewer people. At what point does the system cease to function? How far are we from that point?
 

Xerographica

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All you have to do is to continue to put more money into the hands of even fewer people.

Ok, imagine me at the grocery store. I pick up a pack of artichokes. What do I look for? Do I look at the price tag or do I look at the tag which indicates how wealthy the producer is?

See, the thing is, there are no tags which indicate how wealthy producers are. Why not? Because WE (you, me and everybody else) don't give a flying F how wealthy somebody is. We just care about getting the most bang for our buck. We care about not being ripped off. As a result, the people with the most money...have the most money because they give consumers the most bang for their buck.

It might help if you think of money as positive feedback. Wealth people are wealthy because they've received the most positive feedback. Who gave them all that positive feedback? Shoppers. Do shoppers know the names of the people they give positive feedback to? In most cases they don't. And in pretty much all cases they could care less. They just care about getting their money's worth.

At what point does the system cease to function? How far are we from that point?

The system ceases to function when enough consumers like yourself fail to understand how and why there is a such an incredible diversity of affordable products and services.

Let me try and break it down for you.

1. No two ways of using society's limited resources are equally valuable. For example, you can throw lemons at cars or you can make lemonade.

2. How do we determine which uses are more valuable? There are two possible ways...

A. We shop for ourselves = market economy = private sector
B. Other people shop for us = planned/command economy = public sector

If you are a hasty generalist...and see everybody as pretty much having the same preferences/values and circumstances...then you won't see the problem with command economies. But if you can grasp that we all have unique preferences and circumstances...then you will be able to appreciate the importance of individual valuation.

Ok, here's a simple practical exercise. Can you paypal me $100? If not, then why not? The obvious answer is that you're not going to paypal me $100 because I haven't done anything to earn it. Therefore, the people who have the most money have that money because enough other people feel that they've earned it.

For example...

I'm a millionaire, I'm a multi-millionaire. I'm filthy rich. You know why I'm a multi-millionaire? 'Cause multi-millions like what I do. That's pretty good, isn't it? - Michael Moore

When the government redirects people's positive feedback (via taxes, minimum wages, subsidies, price controls, etc)...we're simply decreasing the total amount of value that we derive from society's limited resources.
 

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Capitalism requires ...a poor class that has the ability to purchase things helps to keep that sustainability.
That's absurd JP. Which large economic systems in history or modern day do not have a significant poor class? And you appear to be implying that capitalist systems therefore perpetuate a poor class "to help keep things sustainable"? Wow!

Capitalistic economies reduced poverty in numbers never before seen in human history.
It created middle class in numbers never before seen in history.

That you point this out as a PROBLEM with capitalism, is just unbelievable.
 

Mach

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The problem is your calibrating "values" in a skewed environment. One which has too much money and the influence that goes along with it in the hands of too few people. All you have to do is to continue to put more money into the hands of even fewer people. At what point does the system cease to function? How far are we from that point?

How do you know it's a problem, when you don't know what point this ceases to function, and don't know how far we are, and cannot now or ever demonstrate specifically that we would not have failed at some point history regardless?

Historically we have more distributed power and value than what, every other system in all of human history? And you think this is bad why? And cease to function...every economy except those currently functioning, have ceased to function. Are you selling a system that has perpetual motion!?! lol.
 

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That's absurd JP. Which large economic systems in history or modern day do not have a significant poor class? And you appear to be implying that capitalist systems therefore perpetuate a poor class "to help keep things sustainable"? ....

From what I have read, countries like Germany, Denmark, Finland and Australia would fit that description. Now granted they do have some poverty, but there will always be a small percent people who chose poverty over work.
 

JP Hochbaum

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That's absurd JP. Which large economic systems in history or modern day do not have a significant poor class? And you appear to be implying that capitalist systems therefore perpetuate a poor class "to help keep things sustainable"? Wow!

Capitalistic economies reduced poverty in numbers never before seen in human history.
It created middle class in numbers never before seen in history.

That you point this out as a PROBLEM with capitalism, is just unbelievable.
Capitalism didn't reduce poverty, two industrial revolutions did.
 

Xerographica

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Yea, I understand why someone wouldn't think that made any sense and may be someone self contradictory.

Thats part of the reason that I touched based upon that just a tad. Lower end workers don't have the negotiating skills or power that higher end workers do. Also, I see income disparity as one of our greatest economic issues. Again, it's more about leveling the playing field than it is a subsidy. The guberment doesn't subsidise companies to pay employees a decent wage, thus minimum wage isn't a subsidy, even though it may be a price control of sorts. Also, when our guberment distributes our tax money to people who work, but are paid low wages, the tax payer is effectively subsidizing the compensation that these low wage paying companies pay - I'd much rather cut out the subsidies that the tax payer pays, and just require companies to pay a decent wage to begin with.

It's the lesser of evils.

Hmmmm. So there are two options...

A. minimum wages, less taxes, less subsidies
B. true wages, more taxes, more subsidies

Let's evaluate it from the perspective of influence. With option A, the employees will have more influence over how society's limited resources are used. Given that Mr. Baker has to pay the higher wages...he has less influence over how society's limited resources are used. With option B, the employees will have less influence over how society's limited resources are used. Mr. Baker will have more influence...unless congress takes the difference.

My point is...I want Mr. Baker to have more influence over how society's resources are used. That's why I want him to be able to choose where his taxes go. Why should Mr. Baker have more influence and his employees less influence? Because he's running a successful business. He's using society's limited resources to benefit numerous consumers. We know this is true because they give him their positive feedback.

In essence, we will increase our total benefit if Mr. Baker has more influence over his resources. So really it boils down to congress versus Mr. Baker. When congress imposes minimum wages...they are being backseat drivers. They are partially destroying Mr. Baker's foresight...

If the socialists mean that under extraordinary circumstances, for urgent cases, the state should set aside some resources to assist certain unfortunate people, to help them adjust to changing conditions, we will, of course, agree. This is done now; we desire that it be done better. There is, however, a point on this road that must not be passed; it is the point where governmental foresight would step in to replace individual foresight and thus destroy it. - Frédéric Bastiat

Minimum wages are a perfect example of governmental foresight stepping in and replacing individual foresight and thus destroying it. My "vote" is for Mr. Baker. I give him positive feedback every time I go to the store because I value/benefit how he is using society's limited resources. I can't say the same thing about congress.
 

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Like most liberals...you fail to think things through. Even the preeminent liberal economist understands that governments are not responsible for the reduction of poverty...In Praise of Cheap Labor.

1) I am not liberal

2) I must assume you lack basic reading comprehension skills, because I made no mention of governments being responsible for reducing poverty.
 

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From what I have read, countries like Germany, Denmark, Finland and Australia would fit that description. Now granted they do have some poverty, but there will always be a small percent people who chose poverty over work.
Germany has more than the U.S. as a percentage of population! Denmark in the same ballpark! Australia is low right now at maybe less than half that, but it's still a huge number of people and Australia would again be an economy that is seeing growth (bubble?).

Use stats please :)
List of countries by percentage of population living in poverty - Wikipedia, the free encyclopedia

It's more appropriate to use much or all of Europe to compare to the U.S., using tiny countries with strong historical cultures is like cherry picking, and even they have a significant poor class.

The lowest? Taiwan. I quote:
Today Taiwan has a dynamic, capitalist, export-driven economy with gradually decreasing state involvement in investment and foreign trade.

If we cherry pick we should all be like Taiwan, capitalist and proud.

But that's absurd too. The analogy I use is with corporations. There are people who will tell me that some company X has this tremendous corporate ethic and employee handbook, that the perks and way it treats its employees is so great it's one of the reasons the company does so well. Wrong in nearly every case, it's always these hot companies that are making so much profit per employee that they could spend 3x more than any other average company on catering to employee needs, and still be making outrageous growth/profit, etc.

Or just like an industry in the abstract. The energy industry in some areas, the south for example, made so much money just by sticking a hole in the ground that the technology used stayed very old and outdated. Why bother when you made so much anyway for so little effort? Do we then look at such industries and claim that they are doing SO WELL because of their outdated technology? NO! They succeed in SPITE OF their old technology.

bleh ;)
 

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1) I am not liberal

Unless you're referring to the classical definition of the term liberal rather then the current definition, the following quote says you are:

"How this all helps capitalism

Capitalism requires sales for it to be sustainable, and a poor class that has the ability to purchase things helps to keep that sustainability. If minimum wages were to increase it would effect the purchasing power of 30 million Americans, and if that wage was raised to $15 an hour it would inject $450 billion into the economy, and not just once, but every year. And this sector of the economy is one in which spends a large majority of their income. This increase in sales for businesses would increase hiring and create more competition with more businesses opening up to capture market share."

Unfortunately you are equating society with those that coerce workers into lower wages. That isn't society, it is a class of people who hold capital leverage over the labor class in any wage negotiations. It is incredibly coercive to do this and actually goes against the coercing tenet of libertarianism.

If we can inject $450 billion into the economy by rasing the minimum wage to $15/hour, why not make $100 or $1000/hr? Answer that question and you should see the fallacy of your argument.
 

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Unless you're referring to the classical definition of the term liberal rather then the current definition, the following quote says you are:



If we can inject $450 billion into the economy by rasing the minimum wage to $15/hour, why not make $100 or $1000/hr? Answer that question and you should see the fallacy of your argument.

I am not gonna respond to a strawman fallacy.
 

FederalRepublic

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I am not gonna respond to a strawman fallacy.

Not sure how that was a strawman, since you did claim the following:

If minimum wages were to increase it would effect the purchasing power of 30 million Americans, and if that wage was raised to $15 an hour it would inject $450 billion into the economy, and not just once, but every year. And this sector of the economy is one in which spends a large majority of their income. This increase in sales for businesses would increase hiring and create more competition with more businesses opening up to capture market share.

Or were you simply posting someone else's claim which you do not agree with?

Since you didn't like that question, let's be more specific. Why arbitrarily pick $15/hr? Why not more? Where does the extra money that gets injected into the economy come from? How is it coercive to say to someone "I'm willing to pay you $X in exchange for Y service"? How is it NOT coercive to say "You MUST pay me $X in exchange for Y service"?
 

JP Hochbaum

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Not sure how that was a strawman, since you did claim the following:



Or were you simply posting someone else's claim which you do not agree with?

Since you didn't like that question, let's be more specific. Why arbitrarily pick $15/hr? Why not more? Where does the extra money that gets injected into the economy come from? How is it coercive to say to someone "I'm willing to pay you $X in exchange for Y service"? How is it NOT coercive to say "You MUST pay me $X in exchange for Y service"?

That is a much better framing of your question :).

Earlier in the article I posted a link to the living wage calculator that showed the absolute minimum for someone to afford to live on basic necessities, food, shelter and clothing. I chose 15 because in most cases the bare minimum to survive was at 10-11 an hour. Right now our production per laborer is near 22 an hour, so I chose 15 as the number because it is above the minimum and below the maximum.
 

FederalRepublic

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That is a much better framing of your question :).

Earlier in the article I posted a link to the living wage calculator that showed the absolute minimum for someone to afford to live on basic necessities, food, shelter and clothing. I chose 15 because in most cases the bare minimum to survive was at 10-11 an hour. Right now our production per laborer is near 22 an hour, so I chose 15 as the number because it is above the minimum and below the maximum.

How does either number ($22/hr or $11/hr) relate in any way to the value of a particular service or product?
 

JP Hochbaum

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How does either number ($22/hr or $11/hr) relate in any way to the value of a particular service or product?

How does a wage relate to the value of a product or service? It doesn't. It is determined by those who have coercive bargaining power.
 

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Capitalism didn't reduce poverty, two industrial revolutions did.
You still haven't responded.
Which large economic systems in history or modern day do not have a significant poor class?

To your second claim, it's irrelevant, and absurd. Everyone can Wikipedia the big non-capitalistic states that have managed to survive by adopting capitalism, and the world got to watch in real time as their economy boomed, their middle class exploded, and poverty declined massively. And the lowest poverty of the nations listed again, Taiwan. Specifically cited as being ever-more capitalistic.

Come on JP, this is like debating against evolution.
 

JP Hochbaum

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You still haven't responded.


To your second claim, it's irrelevant, and absurd. Everyone can Wikipedia the big non-capitalistic states that have managed to survive by adopting capitalism,
.
Err what? If you are going to respond at least try to do in a way that is comprehendable
 

FederalRepublic

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How does a wage relate to the value of a product or service? It doesn't. It is determined by those who have coercive bargaining power.

By "coercive bargaining power", do you mean "choices"?
 

JP Hochbaum

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By "coercive bargaining power", do you mean "choices"?

Choices existed under slavery as well, and in prison, and in falling out of an airplace to certain death. the existence of choice doesn't remove the eixstence of excessive coercion.
 

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Choices existed under slavery as well, and in prison, and in falling out of an airplace to certain death. the existence of choice doesn't remove the eixstence of excessive coercion.

Yet, coercion could be inflated to basically result in the claim that since the universe operates based on cause-effect, every action is coerced. You appear to be doing that.
If you want to expand the definition to include absurdities of your own choosing, be aware of the near infinite truckload of absurdities your argument gets to bring along with it.

If someone offers you a job, and you can accept or reject it, and they personally do not have any illegal hold over you, it's unlikely you are being serious when you claim they are "coerced". For your entire argument to hinge on that....really why bother?
 

FederalRepublic

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Choices existed under slavery as well, and in prison, and in falling out of an airplace to certain death. the existence of choice doesn't remove the eixstence of excessive coercion.

You have yet to explain how offering to pay someone to do a job for you is coercion. For that matter, you haven't really answered any of my questions other than how you came to choose $15/hr for a minimum wage, and that didn't make much sense. Neither the average productivity of the American worker (however that is calculated), nor the minimum survival wage, has any relation to the real productivity of any single worker. So the number you've picked is purely arbitrary. In order for your scenario to be correct, the worker has to provide value equal to or in excess of his wage. You have no gauge to determine that.
 

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False values prevent resources from being efficiently allocated.

Generally, when market evangelists talk about efficient allocation of resources, they mean enriching the rich by letting them externalize costs to be paid by working people and the public. And that's what's happening here.
 
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