EDITOR NOTE: The article you’re about to read is a great primer on the paradoxes of liberal economic policies. Is it possible that by imposing price ceilings to discourage price-gouging, that you may end up paying more in order to pay less? Is it possible that low-income workers may end up reducing the value of their higher wages through an increase in minimum wage? There are plenty of paradoxes to be found the further you get away from simple party-to-party transactions. On a related topic that’s not discussed in the article, is it possible that through government spending programs you may end up sacrificing your financial prosperity later in order for financial safety now? If all this seems unclear to you, read on. The way in which it turns many of our accepted truths upside down is quite mind blowing, particularly if you’re not already familiar with the arguments.
here are two different ways for you to acquire your daily bread, beef, and beer. Using the first way, you produce each of these goods yourself directly. You spend part of each day growing wheat and milling it into flour, with other parts of each day devoted to raising and slaughtering cows and distilling hops.
But you likely acquire these goods using the second way – a roundabout way. You specialize at producing whatever it is you’re best at producing – that is, at what you have a comparative advantage at producing – and you exchange the resulting output for money. You then use this money to buy bread from bakers, beef from butchers, and beer from brewers.
In this roundabout way, you can legitimately be thought of as producing your own bread, beef, and beer. You just do so by using what is for you the lowest-cost method: You specialize in producing whatever it is you’re best at producing – say, accounting services – and then convert that output into bread, beef, and beer. This conversion happens when, being paid in money for your accounting services, you spend this money to buy your dinner.
Yawn. So what?
Grasping this reality is crucial not only for better appreciating big-picture topics such as the nature of a modern economy. It’s crucial also for fully understanding more ground-level – “microeconomic” – matters, including the effects of price controls. Price ceilings (such as those enforced by anti-price-gouging legislation) and price floors (such as government-imposed minimum wages) obstruct the roundabout way of acquiring the goods and services that enrich your life.
To increase one’s prospects of acquiring, say, fuel oil subject to price ceilings, consumers must pay part of the full price by performing tasks other than those for which they have a comparative advantage. Similarly, to increase one’s prospects of selling labor services when minimum-wage legislation is in force, workers must be willing to work excessively hard or in less-pleasant conditions. Minimum wages compel affected workers to work more strenuously or less pleasantly to acquire the income they need to buy the goods and services they want.
Let’s explore further.
When buyers and sellers are prohibited from exchanging at monetary prices above maximum ones set by government, shortages arise. The reason is that buyers want to buy more units at the artificially set low prices than they would want to buy at higher prices, while sellers are less willing to sell at these lower prices. With the quantity offered for sale thus being less than is the quantity that’s demanded at the government-set maximum price, something has to determine which aspiring buyers will succeed in finding units to buy and which aspiring buyers will be among those who go home empty-handed.
It’s possible that this determination will be made by random chance. But that’s unlikely. Each person willing, but not permitted, to pay money prices higher than those set by government can, in practice, pay in non-monetary ways to increase his prospects of being among the lucky buyers to actually find units for purchase.
The most well-known, although hardly the only, of these non-monetary means of payment is waiting in a queue. During the summer 1979 gasoline shortage in the U.S. – a shortage caused by government-imposed price ceilings – my father, desperate to buy gasoline, drove the family car to a filling station one midnight knowing that the station wouldn’t open until noon the next day. He wanted to assure himself a good place in line. (He succeeded. He was only the second person to arrive for the long wait. Being second in line, he was assured of getting gasoline.) My dad waited with the car from midnight until 6:00am when I relieved him. I walked the two miles from our home to the station and my father then walked the two miles from the station to home.
At noon the station opened and I pumped price-controlled gasoline into the family car. (I can still remember seeing, as I pumped the precious fuel, the long line of queued-up cars that snaked off into the distance from behind our car.)
While a naïve person might say that the price we paid for this gasoline is the amount of money handed over to the station attendant, a more astute observer understands that the cost to my father and me of that gasoline was far higher. The amount we paid included 12 hours waiting in a queue, as well as the time and aggravation of trudging by foot back and forth between home and the station.
The price ceiling on gasoline, in short, prompted my dad and me to work to get gasoline by doing tasks at which neither of us were very productive: waiting in a car for 12 hours and walking. The gasoline would have been less costly to us were we able to acquire it, not by waiting and walking, but instead by paying a higher money price – a higher money price that would have been paid out of income earned by working at our specialized jobs.
Just as well-meaning supporters of price ceilings are blind to the heavy costs of this policy, well-meaning supporters of minimum-wage legislation are also blind. They mistakenly suppose that the only consequence of such legislation on affected workers is that these workers’ monetary incomes rise.
When low-skilled workers are prevented by government from competing for jobs by agreeing to work at wages below the government-set minimum, some would-be workers are simply rendered unable to find employment. These unfortunate persons thus earn no income to be spent on bread, beef, beer, or any other goods and services. They must either produce directly for themselves or live off of incomes earned by others.
But the ill-effects of minimum wages don’t play out exclusively in job losses. Because even entry-level jobs have many dimensions, employers who are obliged by minimum-wage legislation to pay their workers higher monetary wages can alter these jobs in ways that make them worthwhile to maintain. Employers can demand that workers work faster. They can more strictly monitor and limit workers’ break times. Personal texting and telephoning while on the job can be reduced or eliminated.
Even low-skilled workers who remain employed with a minimum wage in place are thus constrained by this legislation to work in ways that are less desirable than they’d be absent the minimum wage. While these workers’ monetary incomes might be made higher by the minimum wage, most such workers would prefer less-onerous job requirements to the additional income. If this latter fact weren’t so, employers would not have to be prompted by minimum-wage legislation to pay the higher wages in exchange for greater work effort from their workers. Employers would do so on their own in response to the demands of current and potential workers.
Minimum-wage legislation, in other words, is a means by which government forces some low-skilled workers into the ranks of the unemployed while forcing other such workers to ‘purchase’ increases in their monetary incomes with extra work effort that these workers would prefer not to exert. These workers continue to work only because an even worse option for them than working harder at the minimum wage is not working at all.
Reality Isn’t Optional
Governments are fond of dictating maximum prices and minimum wages. To the economically ignorant, these policies appear humane and worthwhile. But when examined through the lens of economics, these policies are clearly revealed to be harmful to the very persons they are ostensibly meant to help. Under no plausible real-world circumstances would such controls be economically justified.
Originally posted on AIER