Tag: labor

No Home Should Sell for Less Than $100,000

I am appalled by the fact that some people live in homes that cost less than $100,000.  It is truly tragic, and something my conscience can hardly bear.  That is why I support laws that require all homes sold to sell for no less than $100,000.

That is the same argument made by those who support minimum wages, “Sweatshop” bans, and other workplace and compensation regulations.

Every exchange has two sides.  Both parties give something to get something.  When acquiring a home, you give money to get whatever value the home will provide you.  When acquiring a job, you give your productive capacity for money.  If a home costs more money than you have, you simply can’t buy it.  If a wage costs more productive capacity than you have, you simply cannot “buy” it, or exchange your labor for that wage.

Demanding that all homes be sold for at least $100,000 does not magically put money in the pockets of those who have less than that with which to purchase a home.  Demanding work be compensated at a certain price (whether by wage floors, forced offering of benefits, work hour restrictions, etc.) does not magically enhance the productive capacity of the worker.  In both cases, the least well off have simply been priced out of the market.

You may feel sad in your quarter million dollar home when you realize many people have $60,000 houses, but only a fool would respond by demanding homes be sold at a higher price to ease the plight of the less well off.  When you feel bad about people only earning a few dollars an hour, it would be just as foolish to demand that the jobs they wish to purchase only be sold for a higher price than they can afford.

A Law Colleges Love

I’ve often wondered why so many people go to college instead of learning on the job by offering to work for free for a company they like.  Turns out, it’s not that easy to work for free.  In most cases, it’s illegal.

Consider the absurdity of this setup.  Young people are supposed to do something to enhance their earning potential.  Without any knowledge or experience, they do not produce enough value to be worth hiring in most promising career areas.  So they’ve got to do something to gain skills.  Since they’re not worth paying, and it’s illegal to have unpaid workers, they can’t get on the job experience.

It’s supposed to be illegal to have unpaid workers because we wouldn’t want poor, unskilled people being taken advantage of.  Instead, they’re directed to college, where not only do they not earn money, they must borrow tens of thousands just for the privilege of not being paid.  They have limited choice as to what skills they learn, as a huge number of courses and credits are required in areas of little interest to them.  It takes at least three or four years to finish.

When they do finish, it’s often the case that they are only a little more valuable to employers than they were before – and much of that is a product of them being four years older and more mature, not any particular knowledge gained.  Most of the needed skills still must be learned on the job.  Most graduates have no idea what kind of job appeals to them or what they excel at, because they spent time in classrooms, not at workplaces trying different things out.

There are, of course, complicated work-arounds.  Non-profits and degree granting institutions can setup legal unpaid internships in some cases, and some businesses can do certain types of apprenticeships, on the condition that they create no value.

Let me repeat that: as long as unpaid apprentices do not help the business in any way – better yet if they destroy value – it’s possible to have one.  You think I’m joking, but read this language, pasted directly from the SBA website where they list the guidelines for a legal, unpaid apprenticeship.  This is number four in a list of six criteria:

“The employer that provides the training derives no immediate advantage from the activities of the trainees, and on occasion the employer’s operations may actually be impeded”

We want young people to learn how to create value, but certainly not by actually creating it!  We want businesses to create wealth, but not if trainees do it!

You reap what you sow.

You Can’t Have Free Markets without Free People

I’ve run a trading game at seminars and in classrooms where, by the end, all the students agree that free trade creates wealth and restrictions reduce it.  I give out trinkets, ask students to rank how much they value them, then allow them to trade for a few rounds, each with a larger segment of the room.  At the end of each round we tally up the value they place on the goods they have after trading.  As the movement of goods opens up, each person’s wealth in trinkets goes up.  Without producing a single new good, the total value of the goods in the room (measured subjectively by the owners) increases dramatically between the initial dispensation and the few rounds of trading.  Trade creates wealth.

This provides a nice segue into a short talk about the benefits of trade, comparative advantage, specialization, and why trade restrictions make us worse off.  I see several eureka moments as students understand from this simple exercise that freedom to move goods allows resources to go to their highest valued use.  Then I throw in a twist just before Q&A;

“Just as restricting the free movement of goods unnecessarily reduces wealth, so does restricting the free movement of labor; otherwise known as immigration restrictions.”

Hands shoot up.  Despite nearly an hour spent demonstrating and discussing free trade in goods, this single line at the end attracts 100% of the Q&A attention.  Inevitably, well over half the class has a reason why the laws of economics they just learned cannot possibly apply to human resources the way they do to goods and services.  Within the first few questions, every one of these objections withers.  What’s left are objections that have nothing to do with immigration per se, but are problems with the welfare state or the warfare state, and immigration is sought as a scapegoat.

The economic case for the free movement of people is incredibly clear and not hard to make.  Yet those opposed to freedom of movement tend still to cloak their arguments in economic rhetoric.  Even though it’s unsure footing, it is perhaps more comfortable than talking about the moral implications of barring people from interaction and exchange across arbitrary borders.  When you get down to it, it’s one of the most inhumane policies around.  Anyone who talks about helping the world’s poor should start by advocating open borders.

Here’s a great article to get started.

Was Adam Smith Wrong?

Here’s an article I originally wrote for the Prometheus Institute.

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Disagreeing with a man whose face appears on the necktie of many a freedom-lover is perhaps dangerous, but sound reason can’t be sacrificed on the altar of great men – and Smith was a great man.

Indeed, Adam Smith, in his depiction of the division of labor in a pin factory and his timeless prose on the invisible hand and the self-interest of the butcher, offers some of the greatest explanations and defenses of capitalism ever written, even some 230 years later. I consider Smith a great thinker, and a hero of liberty. That doesn’t mean he was never wrong; particularly when it comes to the question of value.

Smith’s thoughts on the derivation of value in his Wealth of Nations laid the groundwork in this area for later thinkers like David Ricardo (another brilliant mind who was right about many other things) and eventually Karl Marx. In the case of the latter we have clearly seen how bad ideas can have horrific real-world consequences. As John Maynard Keynes famously remarked,

“Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist.”

I might add too the bad ideas of otherwise good economists.

Smith essentially, though somewhat confusedly, argued that the value of any good was ultimately derived from the amount of labor it took to produce. Money or commodity prices reflected only the nominal but never the real value of a good. In this way he described the different prices of different goods as a simple formula:

“If among a nation of hunters, for example, it usually costs twice the labor to kill a beaver which it does to kill a deer, one beaver should naturally exchange for or be worth two deer.” (The Wealth of Nations, Book I, Chapter VI)

Smith elaborated further by describing other costs of producing a good, including the role of the entrepreneur and capitalist and the profits they require. Unlike Marx, Smith never denigrated the role of the capitalist or the profits they earned, but his conception of value resulting from the cost of production (ultimately labor) opened the door for the idea that anything charged or earned above the cost of real inputs is unnecessary; excellent fodder for anyone anxious to obtain power by appealing to an envious middle class.

The problem with Smith’s analysis is not that the cost of production has no link to the value or money price of a good – indeed, the two are closely connected. He merely had the relationship backwards.

In reality, prices reflect the money equivalent of the value a buyer places on a good. That is to say, an individual who wishes to have a good places an entirely subjective value upon that good as compared to other goods, and the difference is typically expressed in terms of money. If in Smith’s example no one cared for beavers, the cost of killing a beaver wouldn’t matter; the beaver would sell for little or nothing. There is no one value of a good, but each individual values each good differently, as compared to other goods. It is the same for Smith’s supposedly changeless measure of value, labor. An hour of the same kind of labor may be valued (or disdained) to different degrees by different people.

It is for this reason that price is merely the reflection of the amount of money an individual was willing to give up to obtain a given good in the most recent exchange.

However, Smith was correct in seeing a relationship between the cost of production and price: Once a producer or entrepreneur has an indicator of what someone was willing to pay for a good, he can speculate how much others will be willing to pay in the future. He may be incorrect, but he will start with an estimate based on past experience and hope to get an equal or higher price. It is the estimated price (which reflects the value others place on the good) that will dictate how much he can spend on production. If a producer expects a good to sell for $1, he will be willing to spend up to $0.99 to produce it. (This is obviously a simplification, as he may be willing to take short term loss if he expects long term gains, he may want more than a $0.01 profit, etc.) In other words, the amount of labor and other costs of production flow from the expected sale price of the good, not the other way around. No one will spend more to produce an item than they believe others will be willing to pay to buy it.

Smith correctly saw that the various costs which go into production must be paid by the sale price of the final good. What he failed to see is that the costs of production do not create the price of the final good or imbue it with some objective value, but that the subjective value that each consumer places on the good sends signals backwards to producers and tells them how much they can expend on production without suffering a loss.

That Smith saw the factors which go into the production of a good as the cause of the price, rather than the effect, may seem like a small error. But economics, like all attempts to study the behavior of human beings, is a subtle science which requires great attention to the correct logical progression of actions. A misunderstanding between cause and effect can be fatal.

A slight adjustment to the angle of a satellite signal can, when extrapolated over thousands of miles, result in a beam nowhere near its target location. Likewise, looking at an economic phenomenon, such as the price of a good, from an even slightly incorrect angle can result in consequences far greater than imagined when spread over time and by different minds in different cultures. I would never single-handedly blame Adam Smith for the horrors of socialism. But his backwards theory of value contributed, over time and space, to a set of ideas which laid the theoretical groundwork for socialism – a philosophy completely contrary to the views of Smith.

I still admire and respect Adam Smith as one of the world’s great minds and a positive force in the battle for liberty. His conclusions and prescriptions were correct, even though his methodology was sometimes flawed. However, the lessons to be gleaned are to never let admiration for a great mind blind you to areas in which they are in error; and that even correct conclusions, if based on incorrect reasoning, can be dangerous.