Posts Tagged ‘Price Fixing’

(I apologize upfront for the grammar and typo issues that may exist; this needed to be released at the soonest without its usual polishing due to the situation on the Hill.  Please assist me in sending this far and wide with the spirit of urgency that this subject deserves.)

The war drums for the statist’s campaign continues to beat. This week’s battlefield: minimum wage hikes. The argument: “…tell [your Republican representative(s)] it’s time to give politics a rest for a while and do something to help working Americans.”[i] If we allow these feckless tyrants to have it their way, minimum wage would be indexed to inflation[ii] – at a minimum.

This plan sounds good if only first order consequences are considered – government forces companies to raise the limit on lowest wages, and those workers get paid more… period. It’s simple, elegant, and desirable but it’s also false[iii]. One can understand its appeal to childlike minds when exploring this fantasy with childlike forgiveness of inconvenient facts. If raising wages is the only effect, why not raise it? Is it the only effect over time though?

It’s easy to make arbitrary claims, which seem desirable. Not much more is required than a positive attitude. In addition, an estimable bonus goes to the proclaimer since their opponents are at an immediate disadvantage. Whether their opponents neglect to respond or address the issue, the statists have gained tempo.

If their opponents do not respond, the statists appear justified in claiming (to whoever will listen) that their opponents have no responds, which gives them a façade of being right. Uncritical constituents will be pressured to support the statist cause in the presence of the vacuum created by the nonexistent alternative.

If their opponents choose to respond, however, the opponent’s response would require more time and energy producing a lengthy – and if the statists are lucky, boring – response than what it took the statists to make your arbitrary claim (no thought, effort and hardly any time necessary exerted by the statists). This prevents their opponents from being on the offensive in advocating for their ideas, since they are now wasting time addressing mirages.

For the above reasons, I admit up front that I am at a disadvantage. At this point you and I have spent already 1600% more time/energy than the statists[iv] on this issue (and more to go), and I may have failed to make this paper interesting (hello? Are you still there? This is important to understand.). This disadvantage, however, is short-lived unless the statists pass a law before the truth has its day in the sun – this is precisely their Standard Operating Procedure.[v] Given time, the truth is impossible to conceal when readily available and when honest people like yourselves simply take appropriate steps to acquire it. As we will see, an honest attempt to ground the statists’ fantasy in reality shatters its chimera of good outcomes.

I intend to demonstrate that minimum wage is at best not beneficial, and at worse crippling. [vi] I will show: that minimum wage is a special case of general pricing, and therefore, falls under its economic laws; that minimum wage amounts to price fixing and that price fixing falls between the range of not beneficial and harmful.

To begin, I will assert that wage earners have customers. You might be asking who they might be. Perhaps this perspective is not yet sufficiently fashionable to gain popular support, but it is on all accounts accurate as best as I can judge – their customers are their employers.

Consider the general relationship between customers and businesses. Customers seek out desired services from businesses and exchange money for those services. Is this not what employers do when they post available jobs listings, interview candidates, and ultimately hire them? Also, businesses advertise their service(s) to attract customers and exchange services for money. Is this not what a resume, an interview, and accepting a job offer accomplish?

The many forms of employment share this essential relationship: the employee sells a service to their employer. The customer relationship between employee and employer, though a bit unusual in these terms, means that the price of the service in question falls under the province of the same economic law that determines the price of any service – supply and demand. This is evident in the fact that if the demand for a certain type of doctor is high, yet the supply is low, then their salary will be higher than other types of doctors[vii] – even though the duration of their education/training might be the same. Now consider low skilled minimum wage earners that have no chance to rise above that legal minimum. Might that have something to do with the oversupply of unemployed workers[viii] ready to jump into that job at the legal minimum? Wages, if left alone by the law makers, are controlled by supply and demand.

You might be wondering “what’s the big deal with setting a minimum wage” since wage minimums have existed for so long.[ix] Well, first and foremost, it is a form of price fixing and price fixing is harmful. Since wages are a type of pricing, then fixing it at the lower limit is fixing employee services at a lower price limit, is it not? The harmful results of price fixing is best understood by contrasting the complex chain of judgments, decisions and actions that ultimately determine the price of services within a free market, and the devastation that is created by short circuiting this process via price fixing.

Consider your favorite technological gadget for a moment, be it a computer, a smart phone, a movie-streaming device, or something else. What do you imagine went into its creation? How much effort and thought was necessary? How many trades occurred between the first purchases of raw materials (e.g., paying the workers to mine the metal used in your device) and the assembly of the item[x]; Or how many occurred between the purchase of raw materials and the fabrication the special tools necessary to assemble the item, before it was made available for your purchase?

Our economy is such a complex network of services and trade that I doubt any one person can possess all knowledge essential to the creation of such an intricate item, especially since that knowledge changes every minute of every day as the conditions of the market change. Suppose that a circuit company discontinues a component. Or suppose a new component is created that is cheaper (or costlier) and higher performing. Or suppose that any component changes within the chain of production for any production item. Wouldn’t that necessitate an adjustment down the line that reflects the change “upstream”? Many historical examples exist to show that it does, but for a present example, just watch the Wall Street ticker tape to see the “downstream” effect of “upstream” changes.

These constant changes are a life necessity. Life requires that the actions of a living organism produce more value (to life) than what is consumed during the process. Life requires profit. Any action that yields less value than what is consumed is a deadly process – over time only death (i.e., non-existence) with triumph. This principle applies from the simplest action to the most complex chains of interactions – no one part may operate at a loss (forever). The gives rise to a need to keep one’s ear to the ground and remain aware of changes that may affect profit.

It may seem overwhelming that so many lives rely on profit to be generated across the board throughout the economy. Not to worry though, no one person needs to perform the impossible and acquire all knowledge of the on goings. It is sufficient that at every stage, two living persons (at a minimum) are free to exchange money for services to mutual benefit, or walk. The potential for competitors prevents businesses from arbitrarily pricing services too high, and the potential for other customers prevent customers from arbitrarily setting prices too low. One simply needs, for any particular transaction, to be aware of their options (which always include no transaction).

If the price of a service would consistently cause one party on either end of the transaction to function at a loss, then the nature of existence does not permit the price to remain this way long term – either the service eventually stops or customers eventually disappear. Each member of a transaction is charged (by the nature of their being requiring profit) to protect themselves and at the same time to meet the other’s interest (by the nature of the other’s being requiring profit).

With this understanding of the complex chain of judgments and decisions that go into transactions, with each member performing a service for profit, one can appreciate the precariousness introduced when non-interested parties establishes laws not subject to (and contrary to) the laws of economics (and nature). The result is a short-circuiting of the living judgments, decisions and actions that existed prior to such a decree. Regardless of the reality of the situation, price fixing established by law ignores all living considerations related to what that price should be.[xi] The price is set even if it is contrary to the needs of life – i.e., contrary to profit.

The consequence of this short circuit depends on where the arbitrary price falls in relation to the price established by supply and demand – i.e., where it is in reference to the market price. If the arbitrary price of any service is lower than the market price, the service tends to disappear. If the arbitrary price is higher than the market price, the customer tend to thin out. If the arbitrary price is equivalent to the market price, there is no harm (for now), but there is also no benefit.

If people less likely to perform a service in producing an item due to price fixing too low, the observable effect is empty shelves within a store.[xii] Does this not make sense as the only logical outcome to low prices? It means someone (or some group) in the chain of production would have to function at a loss. Picture the extreme – forced to give away a service – to grasp that anywhere on this continuum tends toward empty shelves. It is difficult to say exactly who will bear the burden of this loss, but the burden will likely rest with the most desperate and/or unaware party. It is fairly easy, however, to determine who would benefit from paying less for an item – the customer. This combination between some party absorbing a loss and another receiving a greater value causes these items to be scarce.

If the number of customers diminishes due to price fixing too high, the observable effect would be fuller shelves within a store.10 Does this not make sense? The combination of benefiting and cost absorbing is different from price fixing too low, so the result is different. The customers avoid paying more than they would have otherwise and tend to buy other items, while businesses prefer to receive a higher than market value for their item, so they stock their shelves with items that customers are less willing to buy.

If the arbitrary price is somehow just right, the result will not differ from the results of market prices. The items on the shelves will be sufficient for regular commerce with no party assuming an undue loss or unnatural benefit. The result will be good, but not better than letting the market set the price. Since current market conditions are constantly a fleeting moment, price fixing has a major drawback. A stationary arbitrary price, which is correct today, will be wrong tomorrow (or eventually) due to the changes in market conditions, resulting in one of the above undesirable outcomes. The market reacts faster than law makers.

Minimum wage is slightly different in effect than ordinary price fixing, in the sense that it applies a fixed price within a limit and not the whole range.[xiii] In this sense, the minimum could be set to zero and essentially there would not be any fixed prices. If the minimum wage was too low, therefore, we would expect that the market would dictate the price of services that fall between that minimum and the maximum.[xiv] The only harm minimum wage could do, would be to be set higher than the lowest paid worker, which would cause those low skilled workers to tend remain on the “shelves,” which is essentially what we have today, is it not?

When statists determine the minimum wage, they are essentially claiming to know better than the millions of people that judge, decide and act in a free market. We see that this is a form of price fixing, and we see that price fixing can only be harmful in the long run and only not beneficial in the short run. Why maintain a minimum wage? Why not abolish it, and any other form of price fixing statists choose to establish? How much more harm are we each willing to take and remain blind to? Isn’t time past due for us to break their drum sticks and send them home?

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[i] President Barak Hussein Obama, Quoted in Monday April 28, 2014 WSJ article, Wage Boost Seen as Wedge Issue in November

[ii] Plan expected to be voted on in the Senate Wednesday April 30, 2014, set up by Senate Majority Leader Harry Reid (D., Nev)

[iii] Fallacy of context dropping

[iv] We are at sentence 16 and Statists use one sentence to say “raising minimum wage puts more money in American’s pockets”

[v] Remember Obamacare (AKA Unaffordable Care Act)

 

[vii] Assuming a law doesn’t exist barring the free exchange in this regard

[viii] The Congressional Budget Office (CBO) projects that the unemployment rate will remain above 8 percent until 2014 (cbo.gov). Estimating 230.4 million working age Americans (census.gov) in 2010, that makes 18.4 million competitors throughout the US.

[ix] “…a long habit of not thinking a thing wrong, gives it a superficial appearance of being right…” – Thomas Paine

[x] To include hiring employees throughout the production chain, the agreements between subcontractors to perform special tasks, and everything in-between

[xi] Refer back to the number of judgments and decisions going into the production of an item, and at every stage, the life of the members are taken into account (so the life of all its members are taken into account), so just imagine what would happen if one member acted towards loss and death

[xii] https://www.youtube.com/watch?v=jWTGsUyv8IE, Observe the comparison on how some shelves are empty while others have a castle of boxes in stock

[xiii] Not considering progressive taxes for a mement

[xiv] All else being equal, but the effects are known to propagate and not to anyone’s benefit – as the cost of the simplest services rise with the minimum wage, so does the cost of the simplest items, which just changed the condition of the market and affects every “downstream” service

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