Comment by dpatru | Hacker News Reader

Comment by dpatru | Hacker News Reader

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> this abuse of the system should be prevented via a minimum wage law. That would cut into the employers profits, but there's nothing wrong with that.

Hazlitt uses the whole book to drive home the most important lesson about economics, and that is: One must consider not just what is seen, but also unseen.

Let's apply this to the case for minimum wage for hotel workers. Sure, the minimum wage helps hotel workers. Sure, hotels will still pay for cleaning services. That is all seen. That is the naive analysis. What is unseen? What is the unseen result of a higher-than-market hotel-cleaning wage?

Workers who would best be employed in other tasks will now be employed cleaning hotels. Other goods and services that are more valued won't be produced because the people who would produce them are busy cleaning hotels.

In general, the low-productivity employment sector will be made less efficient, because of lack of price information. For example, suppose the minimum wage is $7/hr, and the market wage for hotel cleaning is $5/hr while the market wage for cooking is $6/hr. A worker who could do either should, in a free market, choose cooking, because it is more valued (hence the higher wage). But a minimum wage hides this information. So if the worker chooses cleaning, the economy will be $1/hour poorer than it would otherwise have been.

Also, the sector of the economy that employs large number of low-wage workers will become comparatively less efficient because of the high-than-market wage costs. This will encourage capital to flow out of this sector and into other sectors. The unseen effect of the minimum wage is a missing low-wage industry.

This was made very obvious when the US Congress raised the minimum wage on the small pacific island of American Samoa. The result was that major employer on the island left the island and instead built a more mechanized plant in the state of Georgia. A lot of low-tech, low-wage jobs in American Samoa disappeared and were replaced by a lot fewer, higher-wage jobs in Georgia. This was the direct and visible effect, but over time, the unseen effect is the same: industries and jobs that won't exist because the minimum wage makes them illegal.

In general, the low-productivity employment sector will be made less efficient, because of lack of price information. For example, suppose the minimum wage is $7/hr, and the market wage for hotel cleaning is $5/hr while the market wage for cooking is $6/hr. A worker who could do either should, in a free market, choose cooking, because it is more valued (hence the higher wage). But a minimum wage hides this information. So if the worker choose cleaning, the economy will be $1/hour poorer than it would otherwise have been.

In this particular scenario, do you believe that a person chooses between cleaning (an unskilled job) to cooking (a skilled job) based on the wage that is paid?

Either the person is unskilled; then they have no choice. Or they have the skill to be a cook; then they presumably have the skill because they like being a cook, and will certainly prefer to do that over cleaning even if both are paid the same (in fact, they will probably prefer cooking even if it were slightly higher paid; wages only start coming into consideration when the difference is larger).

Now you might argue that people will be deterred from even learning to become a cook in the situation you have outlined. That is doubtful, because again, price plays a much smaller role than you might think. But even if it were the case, the wages of cooks would eventually rise above the minimum wage if demand for cooks is high enough.

It is a mistake to assume that there is always a God-given market price that is the "right" price for goods to have. The development of prices is always a negotiation within society. In the case of the minimum wage, society says that labour should have at least a certain price, because that is the morally right thing (and also avoids certain externalities that opponents of the minimum wage like to ignore). If society agrees on that, then minimum wage is efficient by definition.

> wages only start coming into consideration when the difference is larger

I would think that wage differences would be most important when wages are small. The difference between $5/hr and $6/hr is a lot more important than the difference between $50/hr and $51/hr.

> It is a mistake to assume that there is always a God-given market price that is the "right" price for goods to have. . . . In the case of the minimum wage, society says that labour should have at least a certain price, because that is the morally right thing . . .

I'm not sure what you're trying to say in your last paragraph. There is no such thing as a "morally right" wage. Wages are just prices set by the market unless they are interfered with.

For example, unless you're being paid a government-mandated minimum wage, your wage is set by a mutual agreement between you and your employer. At the time of the agreement, you thought the proposed wage was the best of your options and so did your employer. Had your employer offered you less, then presumably you would have had a better option and would have chosen a different employer. Had you demanded more, presumably your employer would have had a better option and would have chosen a different employee. This is a market wage.

The market, all the people together each choosing as they see best among their various options, this is what generally determines all prices including wages. The market is efficient because each actor chooses what is best for them given the choices of the other actors. Whenever the market is intervened with by government-imposed price controls, like minimum wage, the result is inefficiency (waste): the market acts differently than it would if each actor were free to choose.

One thing conventional economists (not just the hypercapitalist Austrians) ignore is bargaining power. It's fashionable to speak of employers and employees as if both were spheres with equal power. In reality of course, people rent themselves into something which is accurately called wage slavery, where they spend their time under someone's command, watching their tongues. The hotel owner is far more powerful than the room cleaner, and it's very common for bosses to steal wages. (After all, which one can dish out the humiliation while the other takes it?)

Another fallacy of mainstream economics is that markets exist without government. In reality, it is government which creates markets. And yet another fallacy is that markets do not have morality associated with them. Yet markets are intertwined with moral taboos about debt, even in cases where the powerless owe debts to the powerful. (Like with rotten healthcare systems.) David Graeber discusses the history interestingly in _Debt: The First 5000 Years_.

Since the linked article is right-wing, here's a left-wing one which discusses some of these fallacies. (http://www.zcommunications.org/debt-slavery-and-our-idea-of-...)

BTW, if I had to choose between being a well-paid coal miner and a significantly lesser-paid doctor, I'd choose the lower pay.

> In reality, it is government which creates markets.

This seems like a obviously false statement. The norm is for people to trade. Just watch children play: it's extremely common to see them trade toys with each other.

The "black markets" enabled the soviet union and the communist-block countries to survive as long as they did.

The reality is that it is governments are the destroyer of trade and markets through taxation, embargoes, price controls, and trade restrictions.

A significant portion of America's prison population are drug offenders: essentially people who tried to operate in an illegal market.

If governments were necessary for markets, why are there all these markets existing despite governments' attempt to stamp them out?

I think your last paragraph is a point that is genuinely worth having a serious debate about. You are probably familiar with the Prisoners' Dilemma, right?

More abstractly, there are situations where it is in the individuals' self interests to behave in a certain way that will lead everybody to end up in a place where they are worse off than if everybody coordinated to achieve an outcome that is not a Nash equilibrium.

If you define "efficiency" as being "the outcome that you get when there is no cooperation between actors", then you're basically saying "efficiency = Nash equilibria with no cooperation". Then government action (which is simply one possible form of cooperation between actors) is inefficient by definition. But then that's simply a tautology, and a useless one at that. After all, whether the outcome is a Nash equilibrium or not is not a moral category.

If you define "efficiency" as being "the outcome is optimal according to some welfare function" (e.g. social optimality, Pareto optimal, sum of logs, or whatever), then Nash equilibria and efficient outcomes are not the same thing, unless you can somehow exclude the possibility of Prisoner Dilemma-type situations.

Do you have an argument against the existence of Prisoner Dilemmas when it comes to price-setting dynamics?

Edit: And to answer your question about a "morally right wage", I think there was simply a misunderstanding between us. There is a moral argument that human labour should be given some appropriate value. This is similar to more general arguments for human dignity and human rights. This is a question of morality and ethics, and it can be the basis upon which a society decides to introduce a minimum wage law. My personal understanding of morality is in line with such a view, but I am not trying to persuade you to change your system of values, if it happens to be different.

I think many times we (and especially governments) mistakenly believe that their intervention in a market is going to bring that market to an equilibrium with a higher social optimum. Governing bodies are drawn to intervene because they get to extend their power, and even those with good intentions are often overly optimistic about their abilities to predict the outcomes of their intervention.

I think it is really funny that you consider cleaning to be an unskilled job and cooking to be skilled job. They are both low skilled job that are a lot of work. Your anecdotal "they like being a cook" misses the point. On the margin, some people will choose cleaning over cooking.

Society agreeing on a minimum wage does not make it efficient by definition. First of all, "society" is only the majority of voters. Voters pass things that are inefficient all the time. Secondly, efficient has a specific meaning in economics. It means that goods are allocated to where they are most highly valued and produced where they are can be most cheaply made. Given the definition, the minimum wage clearly does distort people incentives to work and leads to economic inefficiency.

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