Economics in One Lesson (Audio)- Henry Hazlitt

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The fallacy that economic decisions only affect one group of people and one point in time, in the short-run is a dangerous idea to embrace, and has been the backdrop of much of the economic failures and destruction for decades. This 7-minute audio version of Chapter 1 of Hazlitt’s classic addresses this fallacy and other “tactics” of “bad” economists.

Briefs: The Economics of Pokemon®

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Pokemon® is a game that I know little about. My six year old son, however knows a lot about it and talks frequently about the phenomenon of rare Pokemon® cards. He kept talking about how these rare cards cost a lot of money. I seized the opportunity to teach him his first lesson on economics: the basic lesson on price, using the principles of supply and demand. I first asked him he knew why these rare cards cost so much money (as if I expected him to say yes). He obviously said that he did not know why and so I proceeded to explain why.

I explained to him that the price of anything (in this case the price of rare Pokemon® cards) is controlled by the how much of it is available to buy (supply) and number of people who want to buy it (demand). This, of course assumes that we are operating in a free market economy. When there are a lot of people that want to buy something of which there is little supply of, the price will tend to increase and that something will eventually be considered to be “expensive”. Conversely, if there are a few people want something that there is a great abundance of, the price will decrease and that something will eventually be considered to be “inexpensive” or even “cheap”. Rare Pokemon® cards (and anything desired that is considered rare) fall into the category of something many people want of which there is little of. In this case desired rare items, people are willing to pay more for something that there is little supply of, because they know that they are competing with a lot of other people that want the same limited amount of the desired items. People who are selling the items know this and are incentivized to sell the items for an increased price. This is the reason why rare items are generally expensive in price. Consumers and their free choices determine the price of items.

It’s not too difficult to understand this idea and how the price of something is affected by supply and demand. This applies not only to rare Pokemon® cards, but also to virtually every good and service that is not regulated by governments and organizations. Even my six year old gets it now…I think.

The Minimum Wage Debate- part 3

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A recent opinion article published on CNN’s website, written by Gov. Peter Shumlin and Gov. Dan Malloy expresses their support for a minimum wage increase. While on the surface, an increase in the minimum wage (or a minimum wage at all) would be beneficial to those minimum wage earning employees (or the economy, in general), there are some unintended consequences that need to be considered. In the article, there were 3 reasons cites as to why these two gentlemen support a minimum wage increase. In this second part of the 3-part series, I will address the second point in their article. Note: You can read Part 1 at http://thelion.us/the-minmum-wage-debate-part-1. You can read Part 2 at http://thelion.us/the-minimum-wage-debate-part-2

Their third point is:

Three, it’s the right thing to do. No American working 40 hours or more a week deserves to live in poverty. Republican governors across the country have also stood in the way of progress. Some have pandered to stereotype, suggesting that a raise in the minimum wage should be rejected because it would only help young workers rather than acknowledging that 88% of workers who would be affected by moving the minimum wage to $10.10 an hour are over the age of 20, and more are over the age of 55 than are teenagers.

New Jersey Gov. Chris Christie and New Mexico Gov. Susana Martinez went so far as to veto minimum wage hikes in their states. Wisconsin Gov. Scott Walker mocked the idea, while Florida Gov. Rick Scott described how the proposal makes him “cringe.” Michigan Gov. Rick Snyder, Pennsylvania Gov. Tom Corbett and Maine Gov. Paul LePage all oppose this common-sense change. And of course there is billionaire Bruce Rauner, running in Illinois, who went so far as to suggest slashing minimum wage workers’ salaries by a dollar an hour in order to keep the state “competitive.” They just don’t get it. Just look at Bobby Jindal, former Republican Governors Association chair and current governor of Louisiana, who recently said — in a widely-criticized partisan outburst outside the White House — that raising the minimum wage was equivalent to “waving the white flag of surrender” on the economy. That’s patently absurd. But it’s what the tea party wants to hear. A fair minimum wage was once an issue upon which Republican and Democratic leaders could agree. But now, the Republican Congress and Republican governors have embraced partisanship and right-wing ideology rather than economic growth. And that’s why we are standing with President Obama today to make clear we won’t wait for Republicans to come around — we’re going to give hard-working Americans a raise and we are going to start today.

Since this is the last installment of my rebuttal to this article, I will comment briefly on their third and last point and then make my arguments in favor of low-wage workers, which coincidentally argues against a raised minimum wage, and frankly against any arbitrarily set minimum wage at all. The reason why I will briefly comment on this last point in the article is because there is no substantial argument for the economic viability of minimum wages (raised or otherwise). Their argument is strictly political and quite frankly, unproductive. Who really cares what political party thinks the other political party is doing, contrary to their view on any economic issue, when the debate should be about how these minimum wages will affect the market, businesses and ultimately the job seekers. When it comes to arguing the economic viability of the minimum wage, the productive discussion would leave politics aside and would instead discuss the effects of price, supply and demand on jobs. While ideally, no one working full time should live in poverty, the ideal is never reality. And there are some real, economic reasons why the minimum wage works contrary to the low-skilled, low-wage worker.




First, raising the minimum wage would introduce more people into the pool of potential employees that are in competition to the low-skilled, low wage jobs, increasing the competition for those jobs. When you arbitrarily raise the wages of a low-skilled job, you make that job (which generally requires little training) attractive to a new group of currently employed workers that were making a wage above the previous minimum wage, that would otherwise not be interested in those jobs. For example, let’s say a man is working in a very labor-intensive cabinet shop making $10.10 an hour and would like to work a job that is less strenuous, but paying the same. If you offered him that deal, he’d take 100 times out of 100. Then, let’s say there is a warehouse owner that needs to hire 5 new warehouse workers at minimum wage of $7.25 an hour. He is only offering minimum wage because the work he needs them to do happens to be not so labor intensive, and worth less than, let’s say the labor of the cabinet shop worker. Then, let’s say that the government sees that the minimum wage is not fair and arbitrarily raises the minimum wage to $10.10 an hour. What happens to the man working in the labor-intensive cabinet shop when he finds out about these 5 new jobs that are paying the same that he is making now, but offer a job that is not as strenuous? This is a simple example of how raising the minimum wage can make it harder to some to find jobs, as illustrated in this scenario.

Second, having a minimum wage in the first place works contrary to the benefit of low-skilled workers, exactly opposite of what politicians and other supporters purports that it does. They claim that a minimum wage protects workers from be unfairly under-paid by businesses, an idea that stems from a complete misunderstanding of how free markets work. In a minimum wage scenario, the set minimum wage is really a detriment to the low-skilled workers because it is essentially the government telling employers how much a worker’s labor is worth, instead of the allowing competing individuals in the market determine the worth of his labor. No matter how much value you put in your own labor, your labor is only as valuable as what an employer is willing to pay you for your labor. And that’s easy to understand. For example, if you have a piece of jewelry that has been in your family for decades, handed down from generations past, it probably holds a lot of value to you. And perhaps you find out that it is not actually made of the precious metal that you once thought, but that doesn’t affect the value in your eyes. However, if you go and try to sell it to someone, even though it holds a high value to you, there is a likelihood that you will not get the amount of money. Again, in the minimum wage scenario, the minimum wage is the arbitrary stated worth of your labor, no matter how efficient or how lazy of a worker you are. Let’s face it. The fact of the matter is that there are some people making minimum wage that aren’t worth minimum wage earning (in terms of quality of work). And there are other workers that making minimum wages that are worth more.

In a minimum wage scenario, the government has already pre-determined your worth, and has gone as far as putting a price tag on your labor. In a minimum wage scenario, there is little incentive for employers to increase a worker’s wage higher than minimum. You may get token raises as a good faith rewards, but you will not see large raises, because the employee knows if you refuse to accept the wages in an attempt to leverage for a higher wage, then he can replace you with someone willing to work at the minimum wage. Again, there is little incentive for the employer to pay more than the minimum wage.

Third, and maybe the most import point is that in a minimum wage scenario, workers lose the single most important factor that contributes to any worker’s ability to obtain higher wages. That factor is the leverage of the market. Market competition (both demand and supply) is one of the driving forces for higher wages. When skilled workers (let’s say accountants) who are generally not subject to any artificial, arbitrary wage constraints (like the minimum wage), look for jobs, there is a salary range that is dictated by the market (other employees in the same industry looking for jobs and employers looking for those same potential employees in that industry). If there is a small amount of available employees with the appropriate skills, compared to the number of jobs employers are seeking to hire, then the market rate for employment (wages) will increase. The opposite will be true as well. Low-skilled workers that have wages rules by minimum wage laws do not have the market as leverage to dictate their pay. Now, having the market as leverage doesn’t mean you will be able to earn whatever wage that you think is fair or what you feel your labor is worth, just as accountant cannot dictate the same. But, what is does is it allows the worker who deserves a higher wage (by hard work) the ability (leverage) to find employers willing to pay the wage he is worthy to earn.

Please comment!

Note: You can read the original article written by by Gov. Peter Shumlin and Gov. Dan Malloy at http://www.cnn.com/2014/03/05/opinion/shumlin-governors-minimum-wage/.

Briefs: Technophobes, as they are

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Not a long time ago, I had a conversation with a friend about cars that could drive themselves automatically, and the reality of them existing one day. And the friend that I was talking to began to lament about how these vehicles would eventually put taxi drivers out of business. His point was basically how this one technological advance would be bad in the sense that it would do way with jobs for one segment of workers. My argument to him was that the new technology would actually create other jobs that had previously not existed at all and would make up for the jobs lost. Would the taxi drivers need to perhaps find a new profession? Probably. The same way the buggy drivers had to when the automobile became widely available after Henry Ford’s invention of the assembly line.

In Henry Hazlitt’s timeless book, “Economics in One Lesson”, he talks about a segment of the population that he refers to as “technophobes“. These are people resist technology advances because, in their mind they lead to the demise of some steady employment for some. They don’t consider that these new technologies don’t exist in a vacuum and require labor to sustain its existence. Technological achievements should be looked at as a labor-saving positives instead of a labor-robbing negatives. The empirical evidence shows time and time again throughout history that despite the introduction of new labor-saving technologies, jobs (as an aggregate) have not dwindled away. In fact, each major technological advance has brought with it a need for more production, a need for more innovation and in short, a need for more jobs.

Imagine that you were around when the concept of the personal computer was born and the thoughts that may have crossed your mind as you thought about the impact of this device on jobs. You might think about how adversely it would affect employment, because after all, the computer can do so much with so little effort or labor. Certainly, it would be the cause of major unemployment. What would happen to the masses of workers who take 8 hours in a day to do the same task that it would take a computer to do in 15 mins? Now think about how much we are surrounded by computers in our current world and how ridiculous a thought like that would seem now. The same could be said about other technological advances like the automobile or the steam locomotive. Think about what those inventions did to human productivity and not only how their introduction into existence did not dwindle jobs but in fact they led to the increase of needed jobs to facilitate all of the economic activity created as a result of their existence.

Mr Hazlitt puts it like this: “Each of us is trying to save his own labor, to economize the means required to achieve his ends. Every employer, small as well as large, seeks constantly to gain his results more economically and efficiently— that is, by saving labor. Every intelligent workman tries to cut down the effort necessary to accomplish his assigned job. The most ambitious of us try tirelessly to increase the results we can achieve in a given number of hours. The technophobes, if they were logical and consistent, would have to dismiss all this progress and ingenuity as not only useless but vicious. Why should freight be carried from New York to Chicago by railroads when we could employ enormously more men, for example, to carry it all on their backs?

Economics if life.

Note: You can get Henry Hazlitt’s book “Economics in One Lesson” at Amazon Books





Briefs: Supply and Salaries

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I heard this morning a comment lamenting the fact that NFL quarterbacks get paid so much more than teachers, and how that just does not seem right. Well, that may be true in once sense; maybe our society in fact places too much emphasis on sports than it does education. But, the salary differential is simply the effect of supply and demand. There are very few individuals in the US that can be NFL quarterbacks (meaning the supply is very small). That drives the price (salary) of the NFL quarterback up very high, when compared to a teacher. And we know that the demand for a good quarterback in the NFL is very high (our society’s emphasis on sports). Conversely, there are millions of individuals in the US that can be teachers (meaning the supply is very high). That drives the price (salary) of a teacher down, when compared to an NFL quarterback.

Economics is life.

The Benefits of the Free Market

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Free markets are somewhat of an enigma to some people and are even looked at by others as a threat to our current society. Some people have the idea that free markets are markets where companies can go un-checked and are free to take advantage of consumers for their own benefit. This view is one that assumes that companies are the ones “holding all the cards” in these markets. However, that is not the case at all. In fact, it is just the opposite. Additionally and contrary to the idea that free markets are a threat, they are what affords our society the high standard of living that we currently enjoy. It is also free markets that are responsible for the innovation that we continually see and for all of the advancements in technology, medicine, and every other industry that we could think of. Let’s look at a few of the benefits of the free market.

Demand Drives Supply
In a free market scenario, supply and demand forces dictate economic results. More specifically, it is demand (the consumers) that really dictates economic results, because demand is what drives supply. And manufacturers (supply) will “react to the market” in the form of responding to demand and manufacture the demanded products. Companies will only manufacture goods that consumers want and are able to buy, as long as it is economically viable (meaning, they can make a profit that will allow them to continue manufacturing the wanted good). They will not manufacture a good that customers do not want and are unwilling to buy.

Innovation
In a free market, competition exists (naturally) also as a way to benefit the consumer in terms of quality of goods. Because consumers (demand) are the driving force in the free market, and manufacturers are competing with others for the same consumers, manufacturers have an incentive to use technology in a way that continually enhances existing products. They are always in the business of making their product more attractive to the consumer to purchase. We see that in





Better products
The competition that is naturally generated in the free market between manufacturers in the same industry also leads to better products for the consumer. The same reason that manufacturers have an incentive to work efficiently and prices their products at competitive prices is the same reason why they have the incentive to innovate their products, or create other products that are better.

Rations Prevented
In a market that is not purely free, there is always the danger of product shortages or even the need for rationing, especially in regard to essential products. For example, in times of fuel shortages, you will inevitably see consumers “stocking up” on gasoline, topping off their tanks in order to prevent the situation where the next time they need gas, they will be unable to find any (because everyone else it topping off and stocking up). Many states have laws which prevent businesses to increase their prices at a level politicians feel would be “unfairly” charge consumers in an emergency situation (price gouging). The fact of the matter is that if the free market were to be allowed to dictate the price, the law of supply and demand would take over and would allow for a more tapered shortage, and more availability to more consumers.

I will discuss more benefits of the free markets in future articles.

Please comment and discuss.

The Danger of Price Control

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Price control is something that may sound like great idea on the surface. Why not set prices on essential products and services (gas, food, electricity, etc.) at a level that is “affordable” to the average consumer? As with many naive ideas, there come some fundamental problems. And this idea is no different.

In a free market, prices are determined by the market activities (the functioning components of the market activities are price, supply and demand). In the basic idea of supply and demand, companies try to set the price of a particular product that they are selling at an amount that will cause consumers to buy the product at the same rate of production. If the price of the product is set too high (a price higher than the consumer is willing to part way with their money acquire the product), then fewer consumers will buy the product, leaving a surplus of products not sold. If the price is set too low, then more consumers will be willing to buy the product than is able to be supplied, and thus causing a shortage.

Companies selling products are always trying to set the price on their product at an amount where supply and demand are equal. In other words, companies want to produce the exact amount of products that consumers will buy, no more, no less. That makes sense, doesn’t it? But we know, in reality that hardly ever happens. In theory, if a company could know at exactly what price to sell their product in order to attract consumers to buy the exact amount of their product that they produced (supplied), then there would be no need for companies to have any overstock or any other surplus goods held in inventory. This is the concept of supply and demand equilibrium. Embedded into the price that is being considered is the amount of profit that the producer of the product will make for each item sold.





Now, when one of the functioning components of the market, by law and legislation, are not able to operate freely (meaning, freely able to be affected by market activities), the other components will be affected. Again, the three fundamental components or factors are price, supply and demand. And when you affect one third of the equation, things will change drastically…and change quickly. When supply is artificially constrained (i.e. government legislation demands that only a certain amount of a particular good can be available to the market), then price is affected (artificially made to increase). For example, when the countries that we import oil from (to produce gasoline) put caps on the amount of oil they will supply to the world, the price of that oil will increase, assuming no change in demand for that oil. That makes sense, right? Because there are a lot of companies in the world that want and need that oil to produce the gasoline to satisfy their particular set of consumers that desire to fill their vehicles up with gasoline (and in this example, the supply of that oil is limited). These companies are willing to pay more for that oil because there are other companies trying to buy the same, limited amount that is being supplied. But, they can only pay an increased amount up at a certain point. They cannot pay just any amount. They can only pay an amount up to the point that it ceases to become cost-effective.

That brings us to another side of the coin. When governments artificially constrain prices, we get a similar affect. When prices, by law and legislation, are fixed at a certain amount, the product being sold does not magically become cheaper to produce. No, in fact, it will at the very least be more expensive to produce. And maybe the product will become even impossible to produce in the long run, because the amount of money that is required to produce the good (labor, materials, etc.) may exceed the amount that the company is allowed, by law and legislation, to charge a consumer to buy (price). At that point in time, there is no reason or incentive for the company to continue to produce a product that they will only lose money on. And eventually, if nothing changes in terms of the control on the price, the product will become unavailable because companies will have no reason (or incentive), by means of a profit, to produce it.

We see this phenomenon in many facets of life, when governments have tried to control the price of a good or service in the private sector of business, only to see either the quality dwindle or the quantity disappear. We see it in rent controlled housing, where the quality of the housing deteriorates. Again, if the landlord can only charge a certain amount of rent, by law or legislation, it limits the amount of resources he can spend to maintain the property, given all of the other operating expenses involved in leasing the apartments (wages to property manager, property taxes, etc). We have also seen the effects of price control in the medical industry, where governments have capped the price on certain medicines, only to make the medicine eventually unavailable because the manufacturers cannot afford to produce the medicine at the controlled price, and still make a profit.

As we look at the idea of price control, we see that there are many unintended consequences. More specifically, we eventually see the complete opposite effect of the intended outcome. While the outcome of price control is to provide goods and services to consumers that would otherwise not be able to afford them, if the price is allowed to be controlled for too long, those very goods will eventually be unavailable altogether because they would cease being produced.

Please comment!