Friday, September 19, 2008

In search of a numerate left

Here is what I would like to know: Why do so few individuals on the political left trouble themselves to address economics? As my brother likes to point out, one of the primary things we lefties have got on our side is Reality. As on the curve above, in certain circumstances--some of us would argue, virtually all circumstances--the bleeding heart solutions are, really, the best solutions on all sorts of levels.

Let's take the living wage vs. the wage ratio approach. The wage ratio approach is so far out there, so radically bleeding heart, that one doesn't even hear it discussed on a legislative level . . not even a little bit.

Judging by our bleeding heart criteria, a living wage initially seems like a great idea. . . but it sort of floats out there by it's self, a fantastic humanitarian notion unsupported by all those Hard Nosed Ideas about Economics and The Reality of Doing Business that the right so likes to pretend are their own.

So we'll move along to a different wage policy instead. I suggest (as I'm sure various other people have suggested at various times) that instead of putting a price floor on labor, it become illegal to pay the lowest paid employees of a company less than 1/5 the pay rate of the highest paid employees.

From an economically literate standpoint, this makes more sense in several ways. Firstly, as the libertarians and neo-cons should be pleased to note, it avoids the market inhibition of a cost floor.

It's true that a 500% boss can be living pretty well while the bottom tier employees basically starve, but I'm not terribly worried about this scenario. . . we don't see a much reduced demand for labor from the price floor currently in place (the minimum wage) because the level of that price floor is very close to market price. So yes, some people might end up, at some point, having to sell their labor for low prices. . . but it leaves the neo-cons and "hard nosed realists" No Room To Complain. No matter how little your company is making, there is always enough to pay your employees 1/5 as much as you take home.

My favorite thing about this approach is that it strikes directly at inequality. I don't think we need more than a 500% inequality factor*; I think that's enough to still give plenty of incentive to innovate and perform well. While maintaining those incentives, it reduces the treadmill effect that "economic growth" combined with increasing inequality creates.

It also reduces incentives for companies to become so mamoth sized, thereby encouraging them to remain small and diverse, protecting competition for the consumers. I think that's worth the fact of some reduction in economies of scale.

Now, don't get me wrong; I don't think this policy would be enough to make it worth abolishing the minimum wage all on it's own. With certain other protections in place, that might be good. . . but even without them, if I had to choose** between a living wage and 20% of the CEO's wage, I'd choose 20% of the CEO's wage any day.

Sadly, the second-largest reason this sort of policy is unlikely to be adopted by the mainstream left is that minimum wage laws are infinitely easier to pass. The largest reason, striking more at the heart of the matter, is that an inordinate amount of funding comes from individuals who make a lot more than five times as much as their employees.

To me, these kinds of solutions seem to be all over the place, and it also seems that no line of defense short of sacrificing babies to the free market on the new moon could defeat them.

So why aren't we talking about them?

*and due to variance between companies, inequality could still be a lot more than 500%.

**given that there would still be various firms competing for my labor. BTW, if anyone out there wants to school me on labor markets and the like, have at.

*** Also, thanks to Indexed for the illustration.


___________________________ said...

The ratio really does not seem more economically literate though. In fact, if I had to choose between the 2, I would pick the living wage, as the ratio is both a price floor and price cap in many ways, combined rather than anything else. Now, to be honest, I think that a common economic approach is a minimum wage supplemented with welfare payments. The wage because it is simple, and the welfare payments because the wage becomes way way way too crude if used by itself.

I also think that if competition were efficient for some of these industries, they would not be large but rather competitive. Some economies of scale are best large.

I dunno, I think that there are very good arguments against these proposals that do not amount to sacrificing babies to capitalism, or anything like this. There might be some issues where defenses amount to baby sacrifice, but honestly, I think these solutions are off the radar because they simply undermine the system.

Day said...

Efficient for what?

One thing I think people often forget is that what most efficiently brings in profits is not what most efficiently serves consumers. I hope you can see that, in many cases, perfect competition most efficiently serves consumers, and monopoly most efficiently brings in profits?

While the wage ratio approach does, indeed, have some things in common with a price-floor-and-cap, it also has one huge fundamental difference. It is not setting an arbitrary number, regardless of supply and demand, that must be payed. There is no concrete limit, other than market price, on how high or how low either end of the spectrum can be. Firms can still compete for the most or least expensive workers--it just becomes impossible to do both at the same time--and if a firm is competing for the least expensive workers, those making the decisions will feel the financial crunch of it as well.

The most important thing it does is re-define what is just acquisition of property, reducing (in the Marxian sense) exploitation. At various points in history we have decided that holding someone up at gunpoint, child labor, slavery, and relieving indigenous peoples of the lands they've been on for thousands of years do not constitute just acquisition of property. You can't have a government that protects private property without having a concept of just acquisition. . .

Paying someone who will never have the opportunity to gain enough education to join your world 60 cents a day for 18 hours of work because you can--because it maximizes your profits--while you take home millions--is not just. It's about time our notion of which private property should be protected by law acknowledged that.

You advocate for a price floor because it is simple, but somehow still better than (much simpler) wage ratios?

Day said...

One other though--

Which ethically or practically positive aspects of the system does this undermine?

___________________________ said...

Efficient in terms of utilizing resources efficiently from the perspective of the various actors involved. There are some industries that will tend towards larger economies of scale, these will be more negatively effected especially considering there are variations in economies inter and intranationally.

Well, what I see is that perfect competition is an ideal that most industries do not reach, and that would be inefficient to try to impose. I mean, I don't think most economists think it wise at all to seek perfect competition at the cost of good economies of scale.

Day, the issue is that the market for low-skilled workers and the market for high-skilled workers ends up being different markets. The entire impact ends up being completely arbitrary, as you are combining a price cap with a price floor, it can vary, but the ultimate sin of this notion is the same as that of the minimum wage just perhaps worsened, as the entire effort will be to try to change the entire pay structure of a company, or even cause certain pay structures to break apart. Minimum wages do not have anything near that result.

I don't see this really redefining a cultural notion, few people even accept the notion you are putting forward, heck, I don't accept the notion you are putting forward, as you are delegitimizing my own self-ownership/freedom of association(as must be noted, I see these things in a libertarian sense). I see this crunching pay structures. I also don't see this being possible, as it will either immediately die upon impact with any political arrangement, or cause such an uproar with businesses, that it becomes unfeasible, or even result in some complicated system of illegal payments. I mean, heck, a "just wage" concept is probably even more culturally possible than a pay crunch. You are right, property does fall hand in hand with the notion of just acquisition.

Why is it unjust? What does my pay have to do with their pay? I chose to pay them, they chose to accept that. Both sides agreed. The issue of pay differentials ends up being an abstraction, and frankly, I see what is more likely to happen, is that either all foreign workers all lose their jobs, or that this happens to all American workers than that the system is changed. This idea you promote, just simply doe not work within the logic of the system, it goes counter to it, like putting acid and a base together. Frankly, I don't see this as a matter of justice so much as goodness, and to be honest, I hate any notion of justice that denies me my right to myself.

A price floor is a *lot* simpler than what you advocate, and I say that with all seriousness, as the system you want will either have to be watered down to be entirely ineffectual, or it might be altering to the point crippling. I don't see how it could be any other way.

Ethically, here is what is undermined:
-Individual self-ownership/freedom of contract
Practically, here is what is undermined:
-The freedom of the labor market, attaching a price floor and a price ceiling to each other, and making them dependent upon each other, does not get rid of the issue that we have a price ceiling and a price floor.
-Economies of scale, in order to work within this rule, if it is made to be effectual, this effectively poses a cap on a company's size before the pay scales begin to break down.
-Lots of legal issues, companies will fight and vie against this idea with all of their might.
-Economic struggles, the combination of all 3 issues can really cause damage to the overall workings of the economy. This can include problems due to massive restructuring issues, labor market issues brought on by attempts to follow the rules, and even flight of human and financial capital.

A major issue is that this isn't a small change. If it were, you wouldn't be asking for it. And given that you are trying to impose a cultural change upon an invention based upon an entirely different culture, I think that the blend will just be problematic.

Day said...

That's a lot to respond to at once, so I'm going to start with a more focused response.

Most importantly:

1) If their pay were not so low, your pay would not buy nearly so much. That's the connection between them. It's like asking the connection between antebellum mansions and slavery.

2) The idea that these workers are entering these contracts out of free choice is very dubious to me because of the following:

- Often the systems that make sweatshop labor available do great damage to other local resources, threatening the option of continuing to make other kinds of livelihood.

- The level of material abundance required to basically fend for one's self and defend one's material rights escalates when much wealthier countries arrive on the scene.

The difference of power involved makes "fair" contracting unlikely. The more powerful parties gain far more from every transaction.

If a choice is made under threat of starvation, is it made freely?

Rebecca said...

Okay, so holy crap--you are smart! I'm not saying that I'm stupid, but right now I'm feeling pretty glad to share some genetic ancestry with you, even if it's on the dumb side of the family!! I love that rather than just knowing the economy sucks, that you are actually thinking about solutions. I could and probably will write a post on family finances and my checkbook, by the way, always balances to the penny, but I wouldn't know where to start with the Nation. I have served on the PTO though, so technically I'm only a few years away from running for vice-president. Seriously, I am just sitting here thinking, "WOW!" Don't have a clue if any of it would work, but so impressed that you thought of it.
-Your Very Practically Minded, But Not Overly Genius Cousin

Day said...

awe. .. thank you, that's incredibly sweet.

For the record, I don't think I'm any smarter than you. Parenthood is a huge job, and even on top of that you seem to have a very busy life. I spend all of my time reading up on this crap while trying to avoid homework. . . lifestyle makes all the difference. :)

It's funny, though, how different people choose to spend their time on such completely different things, even in support of the same values. For example, I'm guessing the two of us both place a very high value on healthy human relationships--but it's lead you to counseling and parenting, and me to economics, philosophy, and writing.

Based on our lives, and the resources and ideas we found around us, I'm sure it's not unpredictable--but still interesting. I wish us both success.

___________________________ said...

Sorry, forgot about this.

1) True, at any given point, the amount of wealth is relatively fixed. However, the issue I would see is that I consider this a process rather than something to be examined at a fixed point in time.

2) I can understand those notions. I still will stand somewhat with sweatshops. I will refrain from a more articulated defense as I am tired and I know a lot of the difference comes from our original intuitions on humanity.

Day said...

To be clear: you are siding with sweatshop labor, but not explaining why?

On your first point, my issue is not that the amount of wealth is fixed at any given point in time, but that the wealth present is distributed in an extremely unequal way at all points in time.

Inequality may seem harmless, or like a necessary stage in getting enough for everyone. However, I think there are two points on inequality that really need not to be ignored.

First, one's place in the economic pecking order has a lot of impact on what one's wealth can accomplish. Impoverished modern Americans may technically have more than ancient kings. . . however, having a refrigerator and a television doesn't change the fact that they now need a car to get to work and a professional wardrobe to keep the job.

The second is a very commonsensical notion. Wealth opens up choices, and thereby provides power. When some people have a lot more power than others, it is inevitably likely that those people will exercise that power over others. This is what I see at the root of the sweatshop system.

jimmyjazz said...
This comment has been removed by the author.
jimmyjazz said...

Radicals are more focused on political economy than economics. Economics obsessively views people in their role as consumers, when in reality their role as economic producers defines them much more. That's why radicals don't bother much about "economics": it's deliberately been made narrow enough to fit within a capitalist framework.

Day said...

I believe that economics as a discipline is noticeably inadequate in some ways, but not fundamentally so unless you believe, for example, that we shouldn't be using a currency.

Has ignoring it worked for us so far?

___________________________ said...

Basically, yes. A technical argument, especially on a blog is not very enjoyable. Particularly since points will have to be proven. I mean, my defense of sweatshops will likely be rather orthodox anyway.

As for inequality, an issue I see is dynamic inequality vs static inequality.

Let's see, positional goods? I would not dedicate a lot of effort to extinguish them, either they are socially constructed(suits), or they are simply the results of a technologically based society, and perhaps market discrimination.

As for inequalities of power, well, what about the power you create with a mechanism with the power to control this power?

___________________________ said...

Economics views people at choosers, given the enormous breadth of economics, the emphasis on both *supply* and demand, and the fact that labor economics is a major field of study. I don't think it is just consumption that is looked at.

As for the narrowness of economics... well, I think the claim is ridiculous given that we have economics and law, new institutional economics, public choice economics, and the various analyses done by Gary Becker, I mean, heck, economist Robert Frank also has argued against inequality based upon positional goods, but he is also a textbook co-author with Bernanke.

It seems a number of attacks on modern economics are to reassert the LTV, but to me, that seems only like it could be a step backwards, as an STV is not only good, but it is essential. The insights of modern economics are also quite essential, including the recognition of a major problem with economics being information, rather than with goods OR services so much, and this seems an insight both profound and perhaps somewhat dependent upon a subjective theory of value to grasp it.

xister said...

So I'm just getting around to commenting on this post that you asked me to look at like 3 weeks ago. Sorry it has taken me so long. I don't even have a ton of time right now, but I will give you my first impressions based on the main post since I haven't had time to read the comments yet.

From a classical economics approach, the main argument for minimum wage is inside the monopsony model (not monopoly). This is where you have many suppliers, but few consumers. The labor market often fits this criterion since everyone is selling labor and there are relatively few purchases who will hire them.

Inefficiencies arise in these cases when the price of labor (or the wage) does not equal the supply of labor. (I could show you graphical and analytical analysis of this if you were her.) It result in your average profit-maximizing firm to give lower wages than the economically efficient amount.

Oddly enough, this problem is largely corrected for by wage differentials. A source of the discrepency between wage and supply is that a firm is forced by market pressures to hire workers at approximately the same wage if they carry approximately the same responsibility. This is again something that I could show you on paper.

The problem with limiting these wage differentials is that not every worker is equally productive. There are actually workers at the same firm that are more than 5 times as productive and some of the workers down at the bottom of the line. Setting salary caps leads to more economic inefficiency.

I note that you ask about efficiency in your second comment. When a classic economist is talking about efficiency, we are not referring to maximizing profits. Monopoly outcomes are economically inefficient. But government intervention in markets that are efficient by themselves is also ineffecient. Inefficient just means maximizing total utility.

Note as well though the maximized utility doesn't mean maximized equity. To an economist, taking all the money from everyone in the country and giving it to one person could be considered just as efficient as scattering it all out among everyone as long as you have the same number of dollars.

Your average liberal economist would claim that a certain degree of inefficiency is the cost of increased equality.

But now I need to go to bed. I hope that my late night ramblings made a little bit of sense.

Day said...


Do I sound like I'm arguing against a subjective theory of value? It is not my intent.


Thanks for stopping by. :)
Like any liberal economist, I am willing to accept some inefficiency for some increased equality. However, I still question your concept of efficiency--because I think it has a very funny concept of utility. For example, doesn't the utility of all the dollars go down if only one person has them?

It's a silly point to make (the metaphor made your point), but seriously, I feel there's a point at which inequality decreases efficiency--if my definition of utility is clear. Inequality certainly decreases net happiness, from what I've read--most people would choose greater relative wealth over greater absolute wealth, and insofar as wealth is tied to happiness, it is relative wealth, not absolute wealth, that's correlated.

I'm not actually arguing for happiness as utility, but it's one example of a positive value that inequality decreases.