Humans ARE Smarter than Yeast

The Gods and Clods Fallacy

Posted by Toban Wiebe at 6:06 pm 3 Responses »

Sep 232011

In the South Park episode, “Chickenpox”, Kyle wonders why Kenny’s family is so much poorer than his. Gerald tells him that a functioning society needs “gods” to do the high-skilled work and “clods” to do the low-skilled work (see clip).

This is a fairly common economic fallacy. To prove it’s false, I’ll show that in a society of all “gods”, people would still do the low-skilled work, and furthermore that low-skilled wages wouldn’t be any lower than high-skilled wages.

Assume that everyone is equally highly-skilled and that there are high-skilled and low-skilled jobs on the market. Because of competition, wages are determined by productivity: employers bid wages up to the point where they are equal to the value the employee contributes to the firm (the discounted marginal revenue product). You might think that the high-skilled jobs will pay more since they are more productive, and this is true, but this arrangement can’t last. Since everyone is equally skilled, they will flock to the high-skilled jobs, increasing the supply of high-skilled labor, and lowering its wage (this is because of diminishing marginal productivity: the productivity of high-skilled jobs decreases as their number increases). Similarly, the supply of low-skilled labor will fall, increasing its wage.

This process will continue until the two wages meet. To see why, suppose the low-skilled wage is less than the high-skilled wage. Then it pays for those in low-skilled jobs to take high-skilled jobs by bidding down those wages, which also has the effect of increasing low-skilled wages. So wages will be equal across the board.

But doesn’t this contradict the fact that wages are determined by employee productivity? No, because of diminishing marginal productivity and the prices of the goods produced. As more people take high-skilled jobs, the productivity of each additional worker falls (marginal productivity). This is because, with only a few workers, they can just do the most productive work. With many workers, they will also be doing less productive work, diluting the productivity of high-skilled labor. Similarly, with few workers in low-skilled jobs, they just do the most productive work.

A further effect comes from changes in the prices of the goods they produce. With many people producing high-skilled goods, their price falls (as a result of increased supply), reducing the productivity of high-skilled labor. With few people producing low-skilled goods, their price rises, increasing the productivity of low-skilled labor. For example, if there were very few gas station attendants, their wages would be quite high, so high in fact that it may become cheaper to automate the job with technology (as has happened with gas pumps and is happening with checkout lines).

So even though the gas station attendant does the same work, he becomes more productive (in the economic sense) as the general productivity of labor rises. As more and more people leave the gas station attendant profession for more productive jobs, the remaining gas station attendants become more valuable and their wages must rise to compensate them for the opportunity cost of taking a more productive job.

In a world with large variations in individual productivity (with both “gods” and “clods”), people do the work they are most productive at and are paid accordingly. And if nobody is willing to take a job at a given wage, then that wage will have to rise, or the job might be automated if that is cheaper. So general increases in productivity benefit individual clods because their opportunity cost, and hence their wage, rises.

Sacrificing the End to the Means

Posted by Toban Wiebe at 9:27 pm 4 Responses »

Jan 012011

In Economic Sophisms, Bastiat tears the protectionist arguments to pieces and makes a powerful case for freedom of trade. In particular, he exposes the widespread jobs fallacy that pervades so much of the popular press and political discourse.

The jobs fallacy is the belief that job creation promotes prosperity. It just seems obvious that more jobs means more prosperity: more jobs means more income. Politicians are constantly clamoring about job creation. But there’s a subtle error here. Bastiat points out the absurdity of this argument.

Labor is a means to the end of consuming goods. The means is not the end, and all value derives from the end. Labor itself does not make us prosper—the results of labor are what we consider prosperity. Labor itself impoverishes us—it is costly: at the very least we lose leisure time. We only engage in labor because we expect the products of labor to enrich us more than the labor impoverishes us. What we’re after is to make a profit—a surplus of enrichment over impoverishment. We want to maximize the ratio of product to labor, of output to input, of result to effort. Keep reading...

Evolutionary Psychology and the Antimarket Bias

Posted by Toban Wiebe at 10:11 am 4 Responses »

Sep 152010

My article was published today as a Mises Daily. Following Paul Rubin, I argue that the antimarket bias is a cultural universal, a genetic leftover from our evolutionary past. Check it out:

Evolutionary Psychology and the Antimarket Bias

Localism

Posted by Toban Wiebe at 1:58 pm 11 Responses »

Jun 122010

The idea that we should “buy local” or that goods should be produced locally is fairly popular, but economically incoherent. There seems to be two main arguments for localism: 1) that long distance transportation is wasteful, and 2) that local spending benefits the local economy and makes people better off. Both arguments are wrong: localism is wasteful and can only impoverish us.

At the most basic level, all goods are produced locally to some people (at least the producers and their neighbors). Why does the location of production matter at all? A head of lettuce moving in a refrigerated truck is the same as a head of lettuce sitting in the refrigerator of the local store. Transportation doesn’t change the nature of the product. Furthermore, “local” is an arbitrary point on a continuum—is local 100 or 1000 miles? Why not 101 or 1001 miles? Taken to its logical conclusion, localism implies that everyone should be a self-sufficient producer and eschew all trade—it doesn’t get any more local than that. To put it bluntly, localism is a bad idea, based on a non-understanding of the economics of trade. Trades are mutually beneficial (else they would not occur) on all levels: from local to global.

Consider an Alaskan and a Colombian trading salmon and coffee. Despite the great distance separating them, this arrangement is the cheapest way of providing the Alaskan with coffee and the Colombian with salmon. If they were to “buy local” they would have to resort to very costly (wasteful) methods of production (such as greenhouses or cold-water tanks) or forgo the product entirely. Needless to say, they are both much worse off without trade. The general principle I’ve outlined is that cost, not location, is the key factor. Alaskans can produce salmon at a much lower cost than Colombians, who can produce coffee at a much lower cost than Alaskans. If the savings from using efficient production exceed the transportation costs, then they both gain by trading because they can acquire the other product at a lower cost than if it were produced locally. By specializing and trading, they minimize waste and conserve scarce resources. To forgo mutually beneficial trades because of location is to shoot yourself in the foot.

The economics lesson here is about scarcity. Since resources are scarce, we must economize their use in order to maximize prosperity. By using the lowest cost methods of production, we minimize the amount of resources that are used up in producing goods. This leaves more resources for the production of other goods, increasing our well-being. In other words, the least cost method is the least wasteful method. So rather than worry about where the product comes from, just look at its price. If local goods happen to be cheaper, then they were produced less wastefully. Same for faraway goods. (Keep in mind, however, that this only holds in a free market, as government distorts prices which hides true costs). A lower price means that less resources were used in bringing the product to you (including the resources used up in transportation). This is why so many goods are produced non-locally: the savings from producing in a more efficient location exceed the costs of transportation. We all benefit from these savings by enjoying more goods at lower prices.

Globalization is often smeared as evil, but in truth, it is one of the greatest triumphs of human civilization. Localism is the real evil as it engenders waste, which can only bring poverty. Global free trade is the engine of worldwide prosperity and continues to be one of the most important solutions in the eradication of world poverty.

Clear Thinking About the Minimum Wage

Posted by Toban Wiebe at 1:38 pm 15 Responses »

May 242010

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.

February Market Anarchist Blog Carnival

Posted by Michael Wiebe at 10:01 pm 3 Responses »

Feb 282009

Good morning and welcome to the February, 2009 edition of the Market Anarchist Blog Carnival.

David Gross presents Like the withered stalk of a cattail posted at The Picket Line. David argues that there is growing awareness of the corruption in the central institutions of authority — government, economy, media, etc.

Andrew Q presents A Libertarian Defense of Property Redistribution posted at Capital Goods. He discusses Carson and Rothbard’s arguments on land theft and property redistribution.

Andrew Q also presents A Critique of Agorism posted at Capital Goods. Agorism is a novel strategy and merits further debate and discussion.

Scott Hughes presents What Freedom Means to Me posted at Philosophy Forums.

Francois Tremblay presents History is written by the idiots posted at Check Your Premises. He discusses the teaching of history and cautions anarchists in their choice of media.

John Petrie presents Toy lead-content regulations hurt small toy makers posted at Blagnet.net. Unsurprisingly, government regulations benefit big business while screwing the little guy.

John Petrie also presents Saving is good, not bad, for American economy posted at Blagnet.net. John discusses the ecognorance of Keynesian pump-priming and the vilification of saving.

David Z presents Legalize ALL Drugs posted at No Third Solution.

Continuing with drug prohibition, see my article The Case Against Drug Prohibition. Not only is prohibition ineffective, but it causes crime, corruption, and increases the risk of overdosing.

That’s all for this edition, which will be the last due to a lack of interest. Thanks to everyone who submitted.

New Article – The Case Against Gun Control

Posted by Michael Wiebe at 6:14 pm 17 Responses »

Jan 272009

I’ve uploaded a new article – The Case Against Gun Control.

Here’s the abstract:

Gun control violates the right of individuals to control their own property. It also violates economic law. Enforcement of gun control creates incentives to produce guns on the black market. Gun control causes crime and corruption, whereas gun ownership actually deters crime, and is a check against tyrannical government. In a free society, weapons can be controlled through voluntary, peaceful means.

I wrote this after reading John Lott’s More Guns, Less Crime. I wasn’t impressed with his empirical approach, so my goal was to build a case against gun control based on economic principles and theoretical, a priori arguments.

New Article – The Case Against Drug Prohibition

Posted by Michael Wiebe at 11:49 am 3 Responses »

Jan 272009

I’ve uploaded another article – The Case Against Drug Prohibition.

Here’s the abstract:

Prohibition violates the right of individuals to control their own bodies, and violates economic law. Any increased enforcement of prohibition creates greater incentives to produce drugs. Prohibition causes crime and corruption. It increases the potency and reduces the quality of drugs, causing consumption-related deaths. The solution to drug abuse is not aggressive violence, but voluntary cooperation.

This article is primarily based on the arguments from Mark Thornton’s The Economics of Prohibition (PDF here). I was also inspired by Milton Friedman’s arguments in his interview on drugs. I think readers will be most surprised by the arguments that prohibition is self-defeating and increases the potency of drugs.

New Article – The Case for Free Trade

Posted by Michael Wiebe at 11:43 am No Responses »

Jan 272009

Here’s the first article from my new articles section – The Case for Free Trade.

Here’s the abstract:

Free trade is both morally and practically superior to protectionism. First, protectionism violates the right of individuals to engage in voluntary exchange. Second, specialization and trade are beneficial whenever there is absolute or comparative advantage between individuals. Finally, protectionism is a negative-sum game: it makes everyone worse off, including the “protected” industries.

For those readers familiar with the Paul Craig Roberts/capital mobility debate, I’d like to know what you think of my critique (in the “Objections” section).