Economic Equality versus Economic Liberty by Alex Merced
One of the fundamental divides among activist economics is what is the goal when thinking of policy and the economy. Progressives focus on Economic Equality and how policy can manipulate the economy to distribute resources in a more "equitable" or "fair" way as measured through income statistics. While Libertarians and Conservatives are more concerned with Economic Liberty allowing capital to flow freely increasing the odds of that capital to flow into the hands of those with the greatest entrepeneurial ability who can put that capital to use developing the division of labor, structure or production, and into innovations that create more accessibility to scarce goods for all.
It's hard to measure the effects of Economic Liberty via statistics because it's about the quality of products and services improving and their costs dropping. For example, the Iphone may not be a cheap gadget, but because of it there are many other purchases I can bypass such as buying watches, gaming consoles, calculators, and many other things people would spend a lot of their wages on is now in one device for much less than all of those individual goods put together. So while looking at income statistics may show "real wages" havn't grown in decades but quality of life sure has increased since less wages are needed to have access to a variety of benefits since you need fewer devices to do more tasks. This is the result on entrepeneurship and innovation which can be magnified by free flow of capital and information which those who support economic liberty focus on.
Although, those who support Economic Equality measure their policies via aggregate macroeconomic income statistics. Just because numbers such as "real wages" grow or "the income distribution" narrows doesn't mean that an increase in the quality of life has occured because quality of life is not tied to how much you make, but what you can buy with it (oh yeah... and if it makes you happy, which is not measurable) which is constantly being imporved by productivity gains and innovation from entrepeneurs. So instead of the hyper focus on labor wages, they'd be better of focusing on fostering entrepeneurship in individuals like the Economic Libertarians.
Showing posts with label High Wages. Show all posts
Showing posts with label High Wages. Show all posts
Wednesday, December 15, 2010
Friday, August 13, 2010
Labor Economics #1 - Sticky Wages
Labor Economics #1 - Sticky Wages
by Alex Merced
The next few posts I'll be writing will be a series on some aspects of labor economics which will mainly center around wages and upward mobility. In this initial part of the series I'm going to address one of the main Keynesian buzzwords, "Sticky Wages".
John Maynard Keyes (read "Where Keynes went Wrong") makes the admission that it's plausible that an economy can self correct by allowing all prices to adjust downwards if the money supply is reduced for whatever reasons, but contends that there is a problem cause wages are "sticky" so this would make it difficult for businesses to adjust their inventories and prices to maintain the current labor supply since wages won't fall in line with everything else so unemployment ensues. This unemployment will then cause further contraction of the monetary supply causing the economy to just spiral downwards as Keyenes expounds on ideas first proposed by Irving Fisher which really are just echoes of antiquated mercantilist thinking.
What I contend is not to deny that wages move slower than the prices of consumer goods, but if anything this should be a reason to want deflation not inflation. First let's look at the structure of production to explore why wages would move slower in either direction.
Let's say my structure of production looks like so...
Labor+Materials+Tools = Consumer Good
Deflation Scenario
So if the Demand for the consumer good increases I have three choices on where I can costs in this simplified scenario. For many reasons I may try to cut costs as much as possible in Materials and Tools since they are homogenous instead of giving up my trained skilled labor which is heterogenous. I may still have to ask my labor to take some level of a cut in pay but only after I exausted my ability to lower the other prices. So essentially I may have been able to cut my costs enough to get a drop in price in the good of 10% yet from cutting costs elsewhere only had to cut labor costs by 5%.
So if this is going on across the economy essentially laborers will have gotten an effective pay raise cause goods have dropped in price more than their wages did. Given if you look at editorials in times like 1870's or late 1830's when you had this sort deflation without massive unemployment (actual growth in the 1870's) going on, yet psycoligically many people felt things were bad cause they saw the nominal numbers going down so there is something to be said for the psycological state of people.
Inflation Scenario
So let's say the demand for my goods has increased cause the money supply has grown for whatever reasons. Since demand is increasing all over the economy, the demand for the same materials and tools I use will increase over different industries and firms that use those same tools. This widespread demand increase will cause an increase in the price of my materials and tools which I'll have to pass on to the consumer yet this increase will be larger than any raise I may give to my laborers in a attempt to prevent too much of an increase in the final goods price that would effect it's demand.
So basically due to increases in costs primarily in capital goods the price of the good has gone up 10% and wages went up 5% which if this is a widepread phenomena results a pay cut for the laborer. Again, psycologically they feel good cause they see their nominal wages going up without realizing their real wages are going down. This is essentially the story in any bubble or boom, except due to problems with CPI calculations inflation is usually understated.
Conclusion
If sticky wages are a real phenomena then deflation would be the much better environment for real wages and for the laborer. Although what is usally proposed by Keynesians and other types of leftist is to push for more inflation which actually hurts real wages yet psycologically breeds consent of the labor class since they only think in nominal terms. In order to have the benefits of deflation yet without the psycological pessimism, it would be a proper use of an economic figurehead such as a president to explain this phenomena to manage expectations and sentiment.
by Alex Merced
The next few posts I'll be writing will be a series on some aspects of labor economics which will mainly center around wages and upward mobility. In this initial part of the series I'm going to address one of the main Keynesian buzzwords, "Sticky Wages".
John Maynard Keyes (read "Where Keynes went Wrong") makes the admission that it's plausible that an economy can self correct by allowing all prices to adjust downwards if the money supply is reduced for whatever reasons, but contends that there is a problem cause wages are "sticky" so this would make it difficult for businesses to adjust their inventories and prices to maintain the current labor supply since wages won't fall in line with everything else so unemployment ensues. This unemployment will then cause further contraction of the monetary supply causing the economy to just spiral downwards as Keyenes expounds on ideas first proposed by Irving Fisher which really are just echoes of antiquated mercantilist thinking.
What I contend is not to deny that wages move slower than the prices of consumer goods, but if anything this should be a reason to want deflation not inflation. First let's look at the structure of production to explore why wages would move slower in either direction.
Let's say my structure of production looks like so...
Labor+Materials+Tools = Consumer Good
Deflation Scenario
So if the Demand for the consumer good increases I have three choices on where I can costs in this simplified scenario. For many reasons I may try to cut costs as much as possible in Materials and Tools since they are homogenous instead of giving up my trained skilled labor which is heterogenous. I may still have to ask my labor to take some level of a cut in pay but only after I exausted my ability to lower the other prices. So essentially I may have been able to cut my costs enough to get a drop in price in the good of 10% yet from cutting costs elsewhere only had to cut labor costs by 5%.
So if this is going on across the economy essentially laborers will have gotten an effective pay raise cause goods have dropped in price more than their wages did. Given if you look at editorials in times like 1870's or late 1830's when you had this sort deflation without massive unemployment (actual growth in the 1870's) going on, yet psycoligically many people felt things were bad cause they saw the nominal numbers going down so there is something to be said for the psycological state of people.
Inflation Scenario
So let's say the demand for my goods has increased cause the money supply has grown for whatever reasons. Since demand is increasing all over the economy, the demand for the same materials and tools I use will increase over different industries and firms that use those same tools. This widespread demand increase will cause an increase in the price of my materials and tools which I'll have to pass on to the consumer yet this increase will be larger than any raise I may give to my laborers in a attempt to prevent too much of an increase in the final goods price that would effect it's demand.
So basically due to increases in costs primarily in capital goods the price of the good has gone up 10% and wages went up 5% which if this is a widepread phenomena results a pay cut for the laborer. Again, psycologically they feel good cause they see their nominal wages going up without realizing their real wages are going down. This is essentially the story in any bubble or boom, except due to problems with CPI calculations inflation is usually understated.
Conclusion
If sticky wages are a real phenomena then deflation would be the much better environment for real wages and for the laborer. Although what is usally proposed by Keynesians and other types of leftist is to push for more inflation which actually hurts real wages yet psycologically breeds consent of the labor class since they only think in nominal terms. In order to have the benefits of deflation yet without the psycological pessimism, it would be a proper use of an economic figurehead such as a president to explain this phenomena to manage expectations and sentiment.
Wednesday, June 16, 2010
Subscribe to:
Posts (Atom)