16 March 2011

Bottom Elephant: Wages are still prices

Something that I think forms an important foundation stone for how I see things, especially in the wake of the recent trade unionism dust-up — prices for labor are still prices.

Wages, just like the prices for corn or pencils or shoes, are not determined based on how we feel about the person getting paid.  They are an information-bearing signal based on supply and demand and the ability of the seller to satisfy the desires of the buyer.  They are not a function of philosophy or morals or warm and fuzzy feelings. (Or cold and bitter feelings.)

This also applies when the conversation shifts to farm subsidies (*ahem* Mr Vilsack!), or trade barriers, or the minimum wage.  Liking teachers or farmers or waiters or poets is not a reason to adjust the prices of their output.

6 comments:

  1. You're absolutely right, but this is contradictory with the capitalist idea that a person must earn their way. See, fact is, machines are getting better and better at doing what humans used to do, and this isn't going to stop any time soon; in the very long run, almost all jobs will be automated, should that be the end of the human species then? Obviously not. What we need is a guaranteed minimum income (consistent with the fact that if a group of survivors landed on an island filled with food, even the laziest would be allowed to eat, but replace the island with automated industry). In *addition* to that, people can continue to work, and be paid according to classic supply-demand equations, which extra pay is an optional luxury.

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  2. [Blogger just ate my comment when I tried to post it, so let me try to reconstruct it as quickly as possible.]

    I don't think we'll reach a point where automation displaces labor in the long run. The same fears were aired all through the industrial revolution and later agricultural revolutions. We keep thinking up knew things that need doing. I think our ability to find new tasks will keep pace with the displacement of labor, though obviously not without friction.

    (I am stilling mulling the effects of "zero marginal product workers" but my intuition is that this wrinkle will add friction but not change the long-term outcome.)

    Also, keep in mind that the increased production from automation makes it easier to meet the minimum needs of everyone to survive.

    I am actually fairly sympathetic to a guaranteed minimum income. If society as a whole decides that everyone deserves a certain minimum standard, then society as a whole should be on the hook for supplying it. This is far more agreeable — from both philosophic and efficiency grounds — than requiring employers to raise wages above the market rate in a method to jury rig the desired outcome.

    I take your point about the desert island, but I would be careful about extrapolating rules for multi-million member societies based on the behavior of groups of a hundred. We behave very differently in small groups than large ones, and our intuition about one doesn't always apply to the other. Nevertheless, I understand your example.

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  3. I agree with this post you wholeheartedly. I have a couple of friends who I can hardly talk to at the moment because they're going into conniptions about a governmental "assault on teachers" and complaining that "teaching is no longer valued."

    I'm fairly confident I would destroy a couple of friendships trying to define a distinction between valued in a philosophical sense and valuable in a monetary sense. Or even trying to explain that being against the teachers' unions is not the same as being against teachers. (Heck, I'd be willing to bet that in a universe without teachers' unions, these friends would be paid more than they are now simply by virtue of the fact that they are good and dedicated, but inexperienced.)

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  4. The situation you describe is one of the reasons I want to identify these "bottom elephant" principles. This way I can tell friends with whom I disagree, "look, the issue here is that I think wages aren't a moral judgement about the worker, and it seems like you do. Until we see eye-to-eye on that I don't think there's anything to be gained by discussing this."

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  5. I agree in principle with "wages are prices" but break a little with the aphoristic "an information-bearing signal based on supply and demand and the ability of the seller to satisfy the desires of the buyer." And I do mean "a little." The problem is that when the buyer of labor is so much more powerful than the sellers (however numerous) you move toward monopsony power. And since friction in the fluidity of labor markets is always high you can get to that point pretty quickly. Sure, wages are prices, but given a world of high capital fluidity and low labor fluidity, there needs to be external controls to balance the difference. Or, put another way, we've already lived in a union-free world and it pretty much sucked for laborers.

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  6. I think with unions we've traded out the threat of monopsony buyers of labors for the existence of monopoly sellers of labor (at least in industry-wise unions), but let's not get into a big are-unions-good-or-bad-on-net? thing now, okay?

    I won't pretend that prices are always perfect. But they are primarily information signals, and the best ones we have. I was being, as I think you recognize, terse with my description of prices. I could be convinced some meddling is necessary to address this fiction or that stickiness, but I want people to keep in mind they are information signals first and foremost. Meddling should be done sparingly, and always with the baseline recognition that we are messing about with this (pretty damn good even if not perfect) signal. When people start thinking about wages as a way to express their feelings about various professions are taking their eyes off the road and veer into very dangerous territory.

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