Abolish the Price System?

Yesterday, a reader took issue with my analysis of the economic impact of minimum wage law. William Gillies writes:

I don’t think you can draw the conclusion about the minimum wage you are from this anecdote. I would tend to agree with you that such a story was more common a generation ago, but is this attributable to the minimum wage or a shift in the nature of global economy?

A generation ago, the decent jobs were mostly manufacturing, something that paid well above minimum wage, but they’ve been moving overseas. Is this attributable to minimum wage, or perhaps the advent of containerization? Are self-serve gas pumps really a response the minimum wage or simply a new technology that’s cheaper to operate than any market determined minimum wage? Is the end of grocery bagging and carry out more to do with the rise of big box grocery stores seeking efficiencies to maximize profit? Smaller independent grocery stores still offer this service (like the Port Hood Co-op). I think the story of ushers would be much the same as grocery carry out since the birth of the megaplex.

I don’t think you can draw such neat conclusions about the impact of the minimum wage, and your argument reads more like a Just So story (I also suspect that Ontario’s minimum wage predates the subject of your story’s entry into the workforce).

The problem with this criticism is that the author misunderstands the source from which these conclusions are drawn. One need not rely on historical understanding, which is ultimately subject to arbitrary valuational judgments of relevance, to know that the economic consequences of minimum wage laws include unemployment and decreased prosperity. Rather, this knowledge can be obtained, and its validity demonstrated, by praxeological conception.

Completed labour results from an exchange. The employer exchanges money for the services of his or her employee. As with any exchange, it takes place at a mutually agreed upon price: the wage rate. It only occurs if each party prefers what it is they receive to that which is provided in return. As the asking price for an employee’s services increases there comes a point at which the employer is unwilling to exchange wages for labour. The result is unutilized labour: unemployment. Minimum wage laws mandate higher wage rates for certain positions, thereby increasing unemployment.

The question of the relevance of minimum wage laws bringing about a decrease in the prevalence of the specific jobs mentioned in the blog post is, indeed, subject to debate. The a priori conclusions about the economic impact of minimum wage laws are not. In fact, they help inform our understanding of history.

And, for the record, while the Ontario government granted itself the power to set minimum wage rates in 1937, the hourly minimum wage was only instituted in Ontario in 1965, long after the subject of my anecdote entered the labour market (emphasis mine):

In light of the growing concern over low male wages, and in response to growing public support for a male minimum wage, a new Minimum Wage Act was implemented in 1937. The new Industry and Labour Board created by the Act was empowered to set minimum wage rates for both men and women, and to set rates across industries or regional zones(…) However, while the Board was able to set minimum wages for men, it issued only one order to that effect. For most male workers outside those on government contracts, the new Act was of little consequence.

(…) A general minimum wage of $1.00 for male and female workers ($1.25 for construction workers) was reached across the province on 27 December 1965.

He continues:

I think it’s a dubious assertion that no minimum wage will lead to increased prosperity for all. I’m not saying this as a defense of minimum wage law, but rather that lower wages are not higher wages.

I disagree. Lower wages are, in fact, higher than zero wages. Also, additional goods and services are better than none at all.

He adds to his commentary by saying:

The minimum wage isn’t even really a living wage, and if the market determined wage floor lies somewhere below the mandated minimum, that’s what businesses are going to pay, and individual employees don’t really have a lot of choice about it, unskilled or an English degree.

First of all, the idea of a “living” or “subsistence” wage is meaningless demagoguery (although I think reference to it should serve, in the words of Ayn Rand, as a methaphorical leper’s bell of an approaching looter). As Ludwig von Mises explains in Human Action:

One of the foundations upon which social cooperation rests is the fact that labor performed according to the principle of the division of labor is so much more productive than the efforts of isolated individuals that able-bodied people are not troubled by the fear of starvation which daily threatened their forebears. Within a capitalist commonwealth the minimum of subsistence plays no catallactic role.

Insofar as concerns the assertion that businesses will simply pay less than the legally mandated minimum wage, the coercive impact of fines or imprisonment suggest otherwise.

And, lastly, he concludes:

Profits come entirely out of the surplus value that owners can extract out of their employees, so it makes perfect sense to pay as little as possible for labour in order to maximize profits.

Ah, yes, the old cliche of the entrepreneur as “capitalist running pig dog who profits as a result of unfairly discounting the sweat off his workers’ brows.” Come on.

Since every business is doing this for themselves, it drives down collective wages. The only counter to this downward pressure is not minimum wage legislation as you rightly point out, it’s employees banding together to ensure that it is not just employers setting the price of labour (Germany has no minimum wage legislation for example). It was strong trade unions (which Germany also has) that drove average wages up by negotiating and sometimes forcing employers to share more of their profits with workers.

Profits are the result of buying low and selling high. Yes, paying below-market wages to an employee may increase profits temporarily, until a competitor comes along and offers him or her a better deal. Because of this, there exists a tendency for the cost of wages and other factors of production to move toward revenues.

In the unhampered market economy, workers’ wages are determined by the prices that consumers are willing to pay for the product of their labour: vendible consumers’ goods and services. If businesses must work toward lower wages, it is because pitiless consumers wish to pay lower prices.

Real wages increase because of saving. Increased capital accumulation results in improvements in the marginal productivity of labour. Output is increased. This raises wages.

As far as unionism is concerned, if the union is successful in its efforts to increase wages for its members, it often achieves this increase in a similar manner as minimum wage laws: through preferential legislation and at the expense of others. In this case: non-union workers. Alternatively, it does so through coercion. Only instead of a government gun in the employer’s ribs it is a union gun pointed in the direction of the so-called scab.

In other words, it would be more appropriate to substitute their “fair prices for all” mantra for “abolish the price system.”

On the contrary, the price system isn’t so bad. After all, it benefits consumers. Oftentimes, workers are consumers too.


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  • About Gregory Cummings

    Gregory Cummings writes about Canadian monetary and economic policy. His writing has been featured at the Ludwig von Mises Institute of Canada and the Ludwig von Mises Institute's Mises Daily publication. Read more.

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