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Economics

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Now few people recognize the necessary implications of the economic statements they are constantly making. When they say that the way to economic salvation is to increase “credit,” it is just as if they said that the way to economic salvation is to increase debt: these are different names for the same thing seen from opposite sides. When they say that the way to prosperity is to increase farm prices, it is like saying that the way to prosperity is to make food dearer for the city worker. When they say that the way to national wealth is to pay out governmental subsidies, they are in effect saying that the way to national wealth is to increase taxes. When they make it a main objective to increase exports, most of them do not realize that they necessarily make it a main objective ultimately to increase imports. When they say, under nearly all conditions, that the way to recovery is to increase wage rates, they have found only another way of saying that the way to recovery is to increase costs of production.

It does not necessarily follow, because each of these propositions, like a coin, has its reverse side, or because the equivalent proposition, or the other name for the remedy, sounds much less attractive, that the original proposal is under all conditions unsound. There may be times when an increase in debt is a minor consideration as against the gains achieved with the borrowed funds; when a government subsidy is unavoidable to achieve a certain purpose; when a given industry can afford an increase in production costs, and so on. But we ought to make sure in each case that both sides of the coin have been considered, that all the implications of a proposal have been studied. And this is seldom done.

I’ve been reading Henry Hazlitt’s “Economics in One Lesson,” and it occurred to me that there is a moral case both for and against minimum wage laws. Yet, it seems to almost be a truism among many people today that these laws are inherently moral. Maybe we should rethink that.

The minimum wage debate basically comes down to which is the greater of the two evils: low wages or unemployment. The fact is that minimum wage laws do put people out of work, and that is a real ethical issue that we should care about.I’m certainly no economist, but here is a hypothetical thought experiment for considering the moral implications of the minimum wage:

Cindy lives in Seattle and is looking for work. Based on her qualifications and experience, most employers would be willing to pay her $280 a week ($7 an hour, assuming a 40-hour work week) to work in a free market. The state of Washington, however, requires employers to pay her a minimum of $367.60 a week ($9.19 an hour, again assuming a 40-hour work week). Since employers don’t value her labor at $367.60, they are unlikely to hire her and will instead hire someone whose qualifications and experience are worth $367.60 to them. Thus, Cindy can’t find a job.

Now, let’s consider what happens when we add unemployment benefits to the equation. Since Cindy can’t find a job, she applies for unemployment relief. This poses two distinct problems for her and for society:

  1. On one end of the scenario, the minimum level of unemployment relief that Cindy can obtain in Washington is $148 a week ($3.70 an hour, if we thought of this as the equivalent of a 40-hour work week). Because her skills actually make her worth $280 a week in the market, but she is prohibited by law from earning that amount of money, she is losing $132 a week that she could have otherwise made. Cindy is effectively banned from earning money she could have used to sustain herself.
  2. On the other end of the scenario, the maximum level of unemployment relief that Cindy can receive is $624 a week ($15.60 an hour, assuming the same conditions as in the previous example). Since the minimum wage entitles her to $367.60 a week, but unemployment benefits are now worth $624 a week, it makes no practical sense for her to work at all. It is more economical for her to be unemployed than to have a minimum wage job. This situation deprives Americans of her services who could have otherwise benefited from them.

Clearly, the moral case is not as black-and-white as minimum wage proponents would have us believe.  Their argument rests on the idea that extremely low wages hurt Cindy’s fundamental human dignity. Yet, unemployment is also an indignity. She loses her sense of self-sufficiency and her feeling that she has earned any success she might have. The indignity of unemployment merits consideration every bit as much as that of low wages.

It’s almost considered heresy in many circles to say that you care about international development and that you believe in classical liberal economics at the same time. You get a lot of funny looks and statements like, “Neoliberalism was one of the worst things to happen to the developing world – look at what the Washington Consensus did to Latin America!”Property rights can help free markets work in developing countries. I recently finished reading Hernando de Soto’s Mystery of Capital, and I think his ideas make sense. De Soto proposes that part of the reason post-colonial developing countries have been unable to replicate the success of Western capitalism is because of insufficient legal infrastructure. For example, he argues that property rights are not respected in many countries and that tasks so simple as starting a small business require as much as two years of paperwork and bureaucratic delay. Ultimately, the poor find the legal system so stacked against them that they simply opt out of it entirely and operate in an extralegal realm where they enforce their own rules. This situation creates an extralegal society not unlike the American Wild West. De Soto also suggests that the representations of capital that exist in the United States (deeds to houses, titles to land, etc.) don’t exist in legally enforceable or consolidated ways in many developing countries. What good is buying a house if you don’t have a deed to show that you own it? What do you do if you cannot sue someone for simply squatting on your land? These situations create obvious problems.

To suggest that markets are failing in developing countries because the poor are simply not entrepreneurial enough or because the whole situation is the fault of Western former colonial powers is both simplistic and somewhat insulting.  The poor in most developing countries are exceptionally entrepreneurial – you cannot walk through the streets of India or China without seeing vendors in stalls selling things everywhere around you. Haggle with the vendors and witness their business savvy for yourself. Yet, it is hard to be successful when a small business permit takes two years to obtain or when you can’t representationally trade your capital through the elaborate transactional mechanisms we have developed in the West.

I don’t disagree that the Washington Consensus was largely a bad idea. It doesn’t seem wise to force austerity measures and artificial liberalization upon economies that aren’t our own. The Washington Consensus, in many ways, flew in the face of certain tenets of classical liberal economics – it was an attempt at central planning. Like many other attempts at central planning, it failed because the central planners and bureaucrats at the IMF and the World Bank didn’t know very much about the local experiences of Peruvians, Venezuelans, Argentinians, and many more people.  The decisions should have ultimately been made in Lima, Caracas, and Buenos Aires, among other capitals. Perhaps then markets would have grown organically and without the intense backlash to Western free market ideas that the Washington Consensus engendered.