Prosperity by Fiat
Suppose that a physician told you that you needed important brain surgery, and that the operation would be very expensive. Suppose, as well, that I offered to perform the surgery for 1/10th the fee your doctor proposed? If you asked about my experiences in such matters, I tell you that, while I am not a physician, I know a great deal about the human brain; that I have one and use it on a regular basis; that I have read some recent, well-researched books on brain-function; and that I would have your best-interests at heart in doing so. Would you take me up on my offer?
As absurd as my suggestion sounds, it is no goofier than the proposal offered up every few years by politicians, editorial writers, and other well-meaning people, to increase the minimum wage. That most of those who advocate such legally-mandated wage levels have as much understanding of economic principles as I have of the intricacies of brain-surgery, does not diminish their enthusiasm for the idea. Those with the strongest opinions on such an issue seem to regard themselves as having a clear understanding of economics by little more than their being able to balance their check-book each month.
A prominent Nebraska newspaper had a recent article that began “Nebraska minimum wage earners will take home an extra dollar an hour in 2016.” Really? Based upon what? Was it because employers had discovered that there was a shortage of marginally-paid workers whose continued employment – even at the new minimum wage level – would increase the profits of their firm? Or does the answer lie in the fact that labor unions and employers already paying above the minimum wage lobbied the Nebraska legislature to increase the minimum wage in order to provide them a competitive advantage?
Murray Rothbard’s classic words to the effect that those who lack an understanding of basic economics principles ought not “to have a loud and vociferous opinion on economic subjects while remaining in this state of ignorance.” The same warning applies to those who would offer opinions on brain-surgery.
Both economic analysis, and the well-documented history of minimum wage laws, confirms that such legislative schemes end up hurting the very marginally-paid workers they were theoretically designed to benefit. Returning to the earlier newspaper article, “minimum wage earners will” more likely start the new year by having their employment terminated, or their hours of work reduced because, at their present wage, they are being paid at a level that is marginally productive to their employers. An employer who pays a higher wage than this is making an economically irrational decision that is likely to add to the prospects of the firm’s business failure.
The high-school civics class mindset in which most of us have been conditioned, tells students little about the real-world nature of economic systems. When it comes to a discussion of the destructive, harmful nature of governmental regulation of the marketplace, students – as well as adults – learn to recite the mantra that good intentions trump adverse consequences. Even the employers who have to accommodate themselves to the economic irrationalities of wage price-fixing schemes, get caught up in the warm and mushy sentimentality that underlies the propaganda on behalf of such programs. One retailer was quoted in the above article that “we would love to give bigger raises, bonuses, that type of thing.” With or without the new law taking effect, there is nothing preventing any business firm from doing this. Any employer could pay its employees $100 an hour – or even $100 per minute – just as there is nothing preventing Congress or any other legislative body from mandating such minimum wages. It costs nothing to make such statements of unearned generosity, so why don’t employers voluntarily do this, or legislative bodies mandate such levels of pay, particularly if – as is defended – minimum wage laws inflict no harm on anyone?
Minimum wage laws run counter to one of the basic assumptions of economic decision-making: men and women will act to maximize their gains, and minimize their costs. A rational participant in the marketplace – be he or she an employer, employee, manufacturer, wholesaler, buyer, or whatever – will be no more inclined to pay more for what they want than what is alternatively available in the marketplace. Should a retailer who is forced by legislative fiat to pay a manufacturer of widgets an additional $1 for each widget he has bought and sold; and would that retailer be inclined to embrace this governmental mandate because of the “good intentions” underlying the measure? If not, where is the logic of this same employer being legally compelled to pay more for the services of employees than what the parties have voluntarily agreed to?