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Mutualist Blog: Free Market Anti-Capitalism

To dissolve, submerge, and cause to disappear the political or governmental system in the economic system by reducing, simplifying, decentralizing and suppressing, one after another, all the wheels of this great machine, which is called the Government or the State. --Proudhon, General Idea of the Revolution

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Thursday, August 10, 2006

Richman and Long on the Minimum Wage

Some good stuff by Sheldon Richman on the minimum wage. In a piece last month for F.E.E., he wrote:

In opposing the minimum wage we should champion the disadvantaged by emphasizing that:

Any regulation, tax, and trade restriction that stifles the formation of new businesses, and thus competition, reduces the bargaining power and self-employment options of workers -- low-income workers most of all. Less bargaining power equals lower wages.

Every intervention that raises the price of housing, clothing, food, and medicine harms low-income people most of all.

Every land-use rule and all government landholding keeps the price of real estate and rents artificially high, harming low-income people most of all.

The actions of the central bank devalue people's money, harming low-income (and fixed-income) people most of all.

A rotten education system harms the children of low-income people most of all.

Simply put, every interference with free people in the free market is first and foremost an attack on the poorest, most vulnerable in society. But notice that each intervention has its beneficiaries; together they constitute the privileged class. The chief enemy of the vulnerable is the corporate state, the system of mercantilist privilege for the politically connected that constrains the creation and diffusion of wealth.

In a follow-up blog post, he cited an old piece by Roderick Long critical of the orthodox marginal productivity theory of wages:

I certainly agree with Mises and Rothbard that there is a tendency for workers to be paid in accordance with their marginal revenue product, but the tendency doesn’t realise itself instantaneously or without facing countervailing tendencies, and so, as I see it, does not license the inference that workers’ wages are likely to approximate the value of their marginal revenue product....

First of all, most employers do not know with any great precision their workers’ marginal revenue product. Firms are, after all, islands of central planning – on a small enough scale that the gains from central coordination generally outweigh the losses, but still they are epistemically hampered by the absence of internal markets.... A firm confronts the test of profitability as a unit, not employee by employee, and so there is a fair bit of guesswork involved in paying workers according to their profitability. Precisely this point is made, in another context, by Block himself: “estimating the marginal-revenue product of actual and potential employees .... is difficult to do: there are joint products; productivity depends upon how the worker ‘fits in’ with others; it is impossible to keep one’s eye on a given person all day long; etc.” But Block thinks this doesn’t much matter, because “those entrepreneurs who can carry out such tasks prosper; those who cannot, do not.” Well, true enough, but an entrepreneur doesn’t have to solve those problems perfectly in order to prosper – as anyone who has spent any time in the frequently insane, Dilbert-like world of actual industry can testify. (The reason Dilbert is so popular is that it’s so depressingly accurate.)

A firm that doesn’t pay adequate attention to profitability is doomed to failure, certainly; but precisely because we’re not living in the world of neoclassical perfect competition, firms can survive and prosper without being profit-maximisers. They just have to be less crazy/stupid than their competitors....

I would also add that even if there are persistent problems – non-governmental but nonetheless harmful power relations and the like – that market processes do not eliminate automatically, it does not follow that there is nothing to be done about these problems short of a resort to governmental force. That’s one reason I’m more sympathetic to the labour movement and the feminist movement than many libertarians nowadays tend to be.

As Richman summarizes the lessons:

The upshot is that a worker whose marginal revenue product is more than $5.15 may still be making only the minimum. An increase in the minimum wage would benefit him. This doesn't mean a minimum-wage law is just. It relies on physical force, interferes with freedom of contract, and has the other costs noted in my original article. As for those who are underpaid (relative to their product), that problem should be addressed as I suggested: repeal of all business privileges, which narrow workers' employment and self-employment options, along with voluntary worker organizations to provide labor-market information and publicize abuses, etc.

I have a few things to add myself. First, this has a bearing on Rothbard's visceral aversion to labor unions. The things he said about labor contracts being unable to improve on the result of the employer's self-interest in a free market might be said just as well of all sorts of other market transactions. The bank that issues your credit card, arguably, doesn't benefit in the long run from dicking people around and arbitrarily changing the terms of their loan. Your landlord doesn't benefit from evicting people without good cause. But being an "at-will" borrower or tenant doesn't sound real pleasant, does it? It's a lot nicer to have things spelled out in a contract so you don't have to depend--in the short run--on the other party being smart enough to perceive his own self-interest. In the long run, self-interest may prevail. But in the long run, we're all dead. In the short run, it feels a lot more secure to have some contractural predictability built in. Anyone who's ever worked for an hourly wage knows the difference between being at-will, and knowing that you can only be fired with cause unless you're part of a mass layoff.

Second, there's a lot of neo-Marxist writing on the labor market arguing that wage discrimination makes sense because the employer benefits from cultural divisions within the work force--i.e., a divide-and-conquer strategy. Ignoring the mutual reinforcement of cultural and ecnomic factors greatly distorts reality. As Long wrote in the piece quoted above,

In the 19th century, libertarians saw political oppression as one component in an interlocking system of political, economic, and cultural factors; they made neither the mistake of thinking that political power was the only problem nor the mistake of thinking that political power could be safely and effectively used to combat the other problems.

Third, to the extent that wages depart from marginal productivity because of privilege and mercantilism--and that's one honking big extent, in my opinion--unions are useful to all workers as a means of compensating for the reduced bargaining power resulting from privilege, and thereby bringing wages closer to productivity. This means that unions are something more than (as right-wing Austrians claim) a way for privileged workers to artificially inflate their wages at the expense of the excluded.


Blogger scumble said...

It's true that unions can turn bad though, when bolstered by government force. I don't think there's anything wrong with collective bargaining but when the state gets involved you can get agressive and violent unions, with those in administrative positions exploiting the average worker as much as the corporate managers. Union corruption is a fairly common theme.

Overall I'm cautious about certain things that "provisionally" offer relief from state-create problems - welfare and so on. It's not so much the principle of helping the poor, but how it gets twisted into something negative. Often people assume criticism of government welfare means you want the poor to starve, and it's difficult to explain how welfare, in the current context, makes sure poor people stay poor and dependant. That's effectively what Sheldon Richman was talking about above. Most people go no further in their reasoning than "the poor don't have much money so they should be given money" as if "the poor" were inevitable and could never look after themselves.


August 11, 2006 12:54 AM  
Blogger Jeremy said...

You're absolutely correct about the dark side of unions, Nathan. I think Kevin is just striking a balance with right libertarians who defend the ideal of the corporation but attack the reality of the labor union. That kind of logic can be turned right back around on them: there's an ideal to the labor union that is worth mentioning, and there's a reality to corporatism that is (or should be) absolutely repugnant to libertarians.

August 11, 2006 7:25 AM  
Blogger Sheldon Richman said...

Thanks for the plug, Kevin. I should point out that Roderick Long and others have pointed out that I gave too much away in conceding that a worker who is not being paid his marginal product might benefit from a rise in the minimum wage. After all, these folks pointed out, if an employer did not appreciate a worker's value before the increase was enacted, why would he appreciate it afterwards? Nothing about hiking the wage would bring the worker's actual value to light. Thus he's likely to be fired when the new minimum opens a gap between his perceived value and what he must be paid. What this means is that the minimum wage is impotent to help any intended beneficiary -- even a worker who's paid less than his marginal product.

August 11, 2006 11:12 AM  
Blogger jomama said...

If a $10/hr minimum wage is good, why not a $100/hr?

August 11, 2006 1:34 PM  
Anonymous Anonymous said...

In a free market maybe most small wages would be $100 an hour.

August 11, 2006 2:18 PM  
Anonymous P.M.Lawrence said...

I really must get around to reloading my publications page after the ISP mess. But it's a bit like KC's post about needing to scale back (and I still ought to do some Reisman follow up stuff).

Anyway, I went into this area at some length, and had a load of material up on my publications page.

It turns out that the decoupling of people with resources (either as owners or - gasp - as slaves, i.e. assets) meant that there was an externality.

This externality was "vagrancy costs", i.e. what happens when you turn people out. Welfare substitutes a state-mediated cost, funded via taxes.

With that, the apparent alternative is to revert to vagrancy costs - cruel and inhumane. Of course, it would be better still to have people connected to resources and so engineer out the problem.

That still leaves out transitional arrangements, how to get there from here without casualties. Most of my material only goes into detail here, with a "Negative Payroll Tax".

That would work by making the tax/welfare interaction go away, allowing a later transition to no government mediation.

What my material omits is how just stopping there would - in many generations - allow a slide into a Malthusian catastrophe.

August 12, 2006 2:19 AM  
Blogger colorless green ideas said...

i guess my question is, given the fact that all these rules and regulations exist that restrict the ability of the poorest and most vulnerable do exist, and are extremely unlikely to be repealed, what is the point in opposing the minimum wage, one of the few things that can realistically (ie: politically possible) be done to improve their plight?

or is it just for rhetorical fun? i think so, as sheldon richman's comment reveals that in theory: "What this means is that the minimum wage is impotent to help any intended beneficiary -- even a worker who's paid less than his marginal product.". yes but in reality it has been very helpful. sure, it is a redistribution of wealth, but a minor one compared to everything else mentioned in kevin's post, and it is a redistribution back towards those who are hurt by the initial predistribution.

August 14, 2006 12:10 PM  

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