Low wages and supply and demand for people

One has to have a great deal of sympathy and understanding for those fast food workers demanding a living wage and one also has to fear that the supply and demand for bodies will keep them down.

There are lots of other people, out of sight and/or not counted,  struggling to survive on low incomes.  They too deserve compassion and understanding.

It has been said that the profits of the fast food industry are sufficient to double the wages of all its workers.  This is not the issue.  The issue is that wages are determined by supply and demand.  The reality is that there are more people than there are jobs.  Some firms have demonstrated they can make good profits by paying their employees well but human nature is such that most employers will continue to pay as little as they can.

Technology has reduced the need for workers and reduced transportation costs have increased the supply of workers from other countries.

With the world economy in crash mode the plight of low-income people is likely to continue and even get worse. At the same time a few will continue to get richer.  The one thing which could level the field would be hyperinflation which would hurt everyone.

Another indication of the oversupply of workers is the declining power of private sector unions.  Public sector unions are still doing well because they have monopoly and political power.  I would have more respect for teachers’ unions if they were to go on strike demanding an increase in well fare rates.

I believe subsidies should be given to consumers rather than producers.  Therefore I would like to see some sort of universal income scheme such as a guaranteed annual income or the negative income tax proposed by Milton Friedman.  This probably would not halt the economic decline but would be fairer than the way we now treat people.  It may be that the American dream is just a  dream.

Wages, union bashing and supply and demand for workers

The media has recently been giving some space to union-bashing right-to-work legislation and the low wages being paid to unskilled workers such as hotel maids and fast food workers.

One of the most basic laws of economics is that price is determined by supply and demand and this also applies to wages and working conditions for employees.

During the long period of almost continuous economic growth there was generally a need for workers.  During this time unions gained strength, wages went up and working conditions improved.  We are now in a situation where growth is stagnating or maybe even going down and there is high unemployment.  Wages can be sticky going down but some how or the other they are going to continue dropping. .

We also have such a high level of technology that it should not be necessary for everyone to “work” most of their lives.

One way to limit the exploitation of workers would be with and income scheme such as Milton Friedman’s negative income tax or my proposal for universal subsistence payments outlined elsewhere on this weblog.

Happy birthday Milton Friedman

In honor of what would have been Milton  Friedman’s 100th birthday the Webb has a number of suggestions that we need him to solve current economic problems.

If he were born in 1912 then he would have been in his 20s as the world was coming out of the depression and his thinking was strongly influenced by the world’s going into a period of unprecedented economic growth.

For his advice to be relevant now he would have to had adapted to current circumstances in which it is doubtful economic growth can continue.

Even so I like a lot of what he said.  Here’s a link to ten of his best quotes.

 

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Poverty

In exploring the world beyond the view from my study window (a large, lush green yard surrounded by tall trees and the mountain beyond the river valley) I came across a discussion of reasons for giving money to the poor.

I believe we have a collective responsibility to ensure that everyone has the opportunity to experience the same standard of living as everybody else.   This should apply to all the people of the  world.

This does not mean that everyone should have to take that opportunity. If a person chooses to do something else that is okay whether it be a life of poverty and medication in a cave or a life ruined by  drinking.

I also believe that full employment is not a realistic goal.  Nor is full employment desirable if it means working for the sake of working when there are other things people could do if they wanted. Nor is full employment desirable if it means using up scare resources or destroying the environment.

I also believe subsides should be given to consumers rather than producers.

And I believe that we as individuals should be able to make our own decisions according to our own values.

Therefore we should deal with poverty and/or ensuring everyone has the opportunity with some sort of universal income scheme.  Milton Friedman proposed a negative income tax.  I take the concept further and suggest an income scheme combined with a new way of creating money in the form of universal subsistence payments.

In either case the income scheme would replace all subsidies to producers and all other income support to individuals.

This approach would require some heavy-duty changes in our ways of thinking and behaving.  Many people would find it difficult to get their minds around these changes.  However, considering the current economic crisis and all the threats it may be that we need drastic changes.

Friedman, capitalism, freedom and a negative income tax

Another Milton Friedman book. This time Capitalism and Freedom.  I was a little surprised and quite relieved when I got to Chapter 12, the second last, and found Friedman advocating a negative income tax.

I was surprised  because one hardly ever hears about this part of his economics in spite of so many people claiming  to be followers.

I was relieved because as I read I liked most of what he said.  However, I believe we have a collective responsibility to ensure that everyone has the opportunity to share the same standard of living as everyone else.  I also believe full employment is not a realistic goal.  Therefor we need some sort of income plan.

If you think about it Friedman without the negative income tax proposal provides a rationalization for the who what to say “to hell with everyone else.”  I must say I figure this applies to only a few of the people who like his approach.

There are two groups of people to whose attention his negative income tax should be brought..

The first are all those who want a smaller and less intrusive government.  We can have that without destroying the lives of many other people so long as we combine it with a negative income tax or some other universal income scheme.

The second group is those who reject a market economy on humanitarian grounds. These are the people to whom “economics”. “profits”, and “business” are dirty words.  I suspect a few of the people who want the government to intervene in the economy are people who like to tell others how to live their lives.

If these people were to study the competitive economic system they would find it promotes a high degree of equality and minimizes profits, goals of which they should approve.

When these two groups have adapted their thinking to a negative income tax or a guaranteed income scheme they should have no trouble coming to a consensus that we should be moving towards a market economy based on the principles of perfect competition.

The problem then would how to deal with those who don’t care about others and those who think they have a right to tell others how to live their lives.

In conclusion I would like to state I believe there is a need to change the way we create money and that an income scheme should be part of  a new monetary plan.  For more on that see the essay “LETS go to market: Dealing with the economic crisis.

 

If you liked this post your are invited to comment, press the like button and/or click  one of the share buttons. If you disagree you are invited to say why in a comment.  While I like the idea of sharing this platform, my personality is such that I don’t reply to many comments.

Milton Friedman and Money Mischief

I have just finished reading Money Mischief, Episodes in monetary history by Milton Friedman published about 20 years ago.

Friedman is remembered for his interest in the economics of money and banking. However, I have two concerns about omissions from this book.  The first is that he places too little emphasis on the T or Q in the quantity theory formula and the second is that he has missed the significance of interest in the creation of money.

Any discussion of money in economics has to include the formula MV=PT because this shows how the real and financial sides of the economy are connected.  This formula states that the stock of money times the velocity with which it changes hands is equal to a price index times the total of transactions or the quantity of goods and services exchanged.

Friedman uses this formula to support a claim that inflation is purely a monetary thing.  Prices go up when there is too much money in the economy and governments control the total amount of money.

My concern is that he does not appear to recognize the potential of T (or Q) to disrupt the economy.

In the chapter on money he suggests T could go down because workers are “paying less attention to their work and more to the stock ticker.”  A few pages later he states: “What happens to output depends on real factors: the enterprise, ingenuity and industry of the people; the extent of thrift; the structure of industry and government; the relations among nations; and so on.”

He may be excused on the grounds that throughout recorded economic history downward changes in T have not been an obvious problem.

However, there is some evidence that the resource base is now being depleted, or at least the most easily extractable, of the resources are gone.  This is certainly going to impact on the T in the formula.  Other things which could impact the formula are climate change, natural disasters or disease epidemics.

MY second concern relates to the role of interest in the creation of money.  Friedman didn’t see this and I have not come across any other economist who has recognized it.

During the 20th century there was a change in the nature of money from that based on a commodity (gold or silver) to money based on fractional reserves and credit.  (For a more detailed discussion of fractional reserve money and its problems, please see my essay “LETS go to market.”)

So long as money was based on gold the total supply was limited by the amount of gold and could be increased only as more gold was dug out of the ground.  If you look at the formula it is easily seen that this could cause problems in a growing economy.

With the switch to fractional reserve money the problem became reversed.  Now there is the potential for too much money to be available.

One of the differences between commodity money and fractional reserve money is that with the latter as new money is created the creators (the banks) demand that interest be paid on that new money.  I see this as a  built n force requiring that even more money be created to pay interest.  I see this as a sort of Ponzi scheme which from time to time collapses into a financial crisis.

Friedman provides a different take on why the money supply is increasing.  “Whatever may have been true for money linked to silver and gold, with today’s paper money it is governments and governments alone that can produce excessive monetary growth, and hence inflation.”

I have to take issue with him.  Fractional reserve money is not paper. It is entries in the computers of the banks.  Governments are involved in its creation when their bonds are purchased by central banks.  It might be good for governments to stop issuing bonds but I am not sure it is fair to blame them for inflation.

However we create money, the formula makes it clear that if the goal is price stability the money supply or its velocity must be easily variable.

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