The Root Problem: Corporations or Government?

Everybody knows that the minimum wage is a good policy, right? Problem is, they’re all wrong. Economists proved long ago that price controls can’t work—they only create shortages and surpluses. The minimum wage is a price floor: if it is set above the market wage it will create a surplus, leaving some workers unable to sell their labor. The overall popularity of a minimum wage is perhaps the best example of ecognorance, and it can only be corrected through economic education. Some simple reasoning will go a long way towards clearing up the minimum wage confusion.

Consider the following thought experiment: suppose that the minimum wage is raised to $1000/hour. What are the implications? Evidently, most employers can’t pay that much and they’ll go out of business. If that weren’t so, we could all become fantastically wealthy just by decreeing a ridiculously high minimum wage. Now suppose that the minimum wage is lowered to $0.01/hour. Again, employers won’t pay that wage (even though they’d like to) because other firms are bidding for the same workers, and this drives wages up. The reason employers don’t pay the decreed wages is that wages are determined by supply and demand, not government edict. Firms hire workers with the goal of earning profits, while wages are costs. They competitively bid wages up to the point where the wage (cost) equals the benefit or extra profit gained from hiring that worker. So competition for profits practically ensures that workers get paid according to their productivity, according to the value of their labor. (In economics jargon, they get paid their discounted marginal revenue product.)

Now let’s trace out the effects of an increase in the minimum wage on the employers affected (e.g., those hiring unskilled labor). First, the increased labor costs lead some firms to lay off workers and others to shut down, since demand for their goods and hence their prices have not changed. But the downsizing and shutdowns reduce the supply of the goods, increasing their price. This new, higher price justifies the higher wage for those who kept their jobs, since they are now producing a more valuable product. The end result is that some workers lose their jobs, while the rest enjoy the higher wage. Consumers lose because prices are now higher.

Since workers are paid according to their productivity (like all factors of production), all the minimum wage does is to make it illegal to buy or sell labor beneath the price floor. The government is essentially saying: “You must be this productive to legally work in our country.” This is most harmful to the least skilled of workers, the ones we want to help most. They will be the first to be fired, and will be cut off from the chance to gain the work experience and job skills needed to earn a legal wage. Allowing such people to work for lower than minimum wages gives them a chance to work their way to a better life. To deny them the freedom to negotiate their own wages and to leave them legally prohibited from working is a moral outrage.

Some clever economists might argue that the minimum wage can increase the total wages paid to all workers. This could happen if the amount of workers unemployed was more than offset by the increased wage. But what is this except human sacrifice?! They would knowingly unemploy the most needy in order to increase the aggregate income of workers. This position is morally bankrupt and an insult to those who genuinely want to help the less fortunate.

In sum, the minimum wage harms the very people it intends to help. It’s a moral outrage that ought to be instantly abolished. Freedom is the best policy to help the poor.

Recommended learning:

Gene Callahan’s excellent analogy, in which he compares the minimum wage with a hypothetical “minimum stock price”. Find it in his book, Economics for Real People (free online), pages 189-194.
Roger Garrison’s Mises University lecture. You can follow along by downloading his powerpoint.
Mary Ruwart, Healing Our World (free online). A great book for leftists, Ruwart shows how government restrictions hurt the poorest to the benefit of the wealthy and politically connected.

“Capitalism is the best. It’s free enterprise. Barter. Gimbels, if I get really rank with the clerk, ‘Well I don’t like this’, how I can resolve it? If it really gets ridiculous, I go, ‘Frig it, man, I walk.’ What can this guy do at Gimbels, even if he was the president of Gimbels? He can always reject me from that store, but I can always go to Macy’s. He can’t really hurt me. Communism is like one big phone company. Government control, man. And if I get too rank with that phone company, where can I go? I’ll end up like a schmuck with a dixie cup on a thread.” —Lenny Bruce

A common refrain among people unfamiliar with libertarian theory is that corporations are the problem and government is the solution—that government needs to tightly regulate private business to rein in corporate greed. This view is fundamentally confused. It entails that private business—which derives its means by voluntary exchange—is the problem, while government—which derives its means through violence—is the solution.

First, greed is a universal feature of human nature that’s here to stay. Businessmen have always been and will always be greedy. And the rest of us are greedy too, in the sense of being self-interested. That includes the agents of the government. Since government can use violence to achieve its ends, we should be much more worried about predation by greedy politicians and bureaucrats.

Of course, businessmen are not angels. Like all people, they can be jerks and criminals. Adam Smith’s great insight was that businessmen benefit others not out of benevolence, but by their own greedy pursuits in a free market. Under the institution of free market competition, private predation can be minimized and the social benefits of greed can be maximized. But this cannot be achieved with a government in existence.

Greedy businessmen don’t passively submit to regulations, they lobby and do whatever they can to gain control of the regulatory body. Once they have access to the political means, they use it as a tool to hinder their competition, to the detriment of everybody else. Gabriel Kolko has shown that even the Progressive Era regulations were pushed through by big business to restrict competition. Where there is government, businesses will fight to control it for their benefit. Under government, the corporation becomes an exploiter.

In fact, free market competition is the best kind of “regulation”. Where there is competition, people have choice and can avoid businesses they don’t like. And businesses have incentives to publicize the misbehavior of their competitors. Competition is simply the best check on private predation. Furthermore, it can be supplemented by other voluntary measures, like boycotts, to seal any cracks. There is no reason to introduce legalized violence in the form of a government.

Government is not the solution, it is the root problem. Government brings with it the problem of public predation, and creates the avenues for systematic private predation. Advocating more government as the solution to private predation is like trying to put out a fire by dousing it with gasoline. Without government, private predation can be restrained through market competition. In other words, government is the ultimate cause and corporations are the proximate cause of the problems. Don’t be a branch-striker. Strike the root.

[Further reading: Roderick Long, Can We Escape the Ruling Class]

Libertarian Anarchy

Clear Thinking About the Minimum Wage