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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.
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.