post

Addressing the Living Wage

Since the mid- to late-1800s, better working conditions have been proposed by both activists and government bureaucrats, with constant political pressure on entrepreneurs having yet to cease. Of the many policies that have been suggested or, better yet, enforced, there is one in particular that has remained consistent: increasing the minimum wage.

As of late, it has been referred to as the “living wage.” This policy essentially advocates that companies increase the pay of their workers, particularly those that maintain a meager amount of skills valued in the market. After brief analysis, however, one will conclude that the “living wage” is nothing more than an asinine populist term that maintains steep repercussions not only for companies, but also for the intended beneficiaries of the policy.

Even when examining this progressive concept without much thought, it still falls under scrutiny. Its advocates claim the wage is determined by calculating the expenses for food, healthcare, rent, transportation, childcare, and a handful of other costs in a particular area. Like the CPI, these costs are completely arbitrary. Of the millions of individuals who maintain subjective consumer tastes, preferences and tendencies, how can one accurately determine an average price that would efficiently fulfill each individual’s need?

Before we proceed, one must grasp those economic dynamics that determine wages, which we will find is nothing more than a price. Prices, and the signals they convey, are a vital tool in a market economy. They are essentially a language. They allow both producers and consumers to observe and communicate the aggregate value of a particular commodity or factor of production. These prices reflect the current market conditions of the good or service consumers wish to purchase, without having to know its current supply.

 

Think of it as a simplified ledger conveyed into a single number.

The determination of the price of the good or service is determined purely by its demand. This is not to insinuate that demand is the only influence of a price, but is rather the origin of the good or service in question. The supply of the given good or service maintains its importance in the determination of the price, but it is certainly not the driving factor.

The failure to realize demand is the vital determining factor of a price. This has created the claim that an increase in wages inflates the price of a good, which is misleading. Prices are not set by producers and the costs of production, but rather by consumers. The price can only be raised by the producer to the point where consumers are willing to purchase the good, due to elasticity. For the remainder of this analysis, we will refer to demand as the demand for labor.

When demand has been realized in the marketplace, workers will offer their labor to meet the demand, which constitutes the supply of labor.

the living wage

In essence, the living wage intends to support those who maintain little to no skills. The main concern with this notion is that there is already a large supply of unskilled workers in the marketplace. When the wage rate is mandated to be set above its equilibrium price, a surplus of labor arises. With each additional increase in labor, the utility of each additional laborer decreases. This is otherwise known as the law of diminishing marginal utility. During the production process, the entrepreneur utilizes the amount of labor required to fulfill the marketplace demand. With each additional worker enacting their labor, a point will ultimately be reached where an additional input of labor will generate no return, and instead increase the cost of production. This concept is known as the law of diminishing returns.

With these economic principles being realized, the entrepreneur will determine the amount of labor needed to generate the required output to receive a profit, or at the very least break even. The entrepreneurs will pay each laborer their price which was set by the market demand for their skills well before the production process is complete. This is because laborers tend to have a high time preference, meaning they prefer income now rather than later. This causes the individual with a high time preference to receive their income at a discounted rate.

This concept is what determines the wage rate of the laborer, known as the discounted marginal value product, or simply the marginal product. Simply put, each laborer’s wage is determined by the required output to satisfy consumer demand. But why, one may ask, has productive output increased over the past few decades, yet wages have been stagnant when adjusted for inflation?

One could make dozens of suggestions, but the most observable is the increase in the productivity of capital goods. One must recall that labor is not the only factor of production.

Contrary to those who favor a universal basic income and who maintain this erroneous fear of automation, the increase in output due to capital investment is a good thing. This is because the increase of output at lower production costs due to capital investments allow consumers to purchase goods at lower prices! This is why, contrary to Keynes in his General Theoryreal wages are what is important, not money wages. As long as artificial inflation is not induced, the purchasing power of real wages to consume goods and services ensures a respectable quality of life.

the living wage

We have established what constitutes the wage of a laborer, and have also determined that wage rates artificially held above the equilibrium price set by the market results in surplus labor, thus unemployment.

We may now conclude that this surplus of labor induced by the artificial wage set by the government, in fact, harms and discriminates against unskilled workers. As noted earlier, a brief observation of the “living wage” can be turned on its face. With further analysis, it is simply not feasible and maintains damaging ramifications. The “living wage” is nothing more than left-wing populist rhetoric that seeks to reach politically-expedient goals in the immediate future, disregarding the externalities and negative long-term effects of the policy.

This article was originally published on the website Being Libertarian. It can be found on their website here.

Share on facebook
Facebook
Share on twitter
Twitter
Share on linkedin
LinkedIn
Share on email
Email
Share on print
Print
post

The Economics of Voluntary Charity

Have you ever thought about the economics of voluntary charity? Probably not. Let’s take a look together, shall we?

“The single most important factor about the free market is that no exchange takes place unless both parties benefit.”

A free market is one term for voluntary commercial actions, entered without interference from coercive government laws, programs, and regulations. But in a free market, is there any incentive to give to those less fortunate?

Some people say no, and therefore the government must force people to support the poor. This is obviously untrue, since many organizations such as Voluntaryism in Action exist to help the poor. But it’s not enough, some say: people who want to cast off the yoke of government welfare just hate the poor, and want them to be dependent on the whims of the rich.

Leaving aside for a moment the drawbacks of being dependent on the whims of government, is there nothing at work in voluntary charity besides the fickle feelings of wealthy folks? I say there’s quite a bit more: simply, that charity works like any other function in the free market, and the most efficient and effective solutions will be found through freely chosen, voluntary cooperation.

It’s easy to see what the receiver gets out of the voluntary charity. But what about the giver? There must be some incentive for them to give. On an individual level, this is easy to see: they feel good about themselves. Reducing voluntary charity to a simple market transaction, the donor exchanges his or her time, money, or goods in return for the euphoria—in common parlance, “warm fuzzies”—that comes from having helped someone.

But what about when it comes to large organizations, such as businesses? There’s no one individual to feel the euphoria, so does that mean that the incentive to give is gone? Not at all, but it is more complicated.

"The overall effect of the free market is that needs are satisfied in the most efficient manner possible."

In a free market system, any business depends on public opinion for its existence. Reputation is everything, and a poor reputation will drive away customers faster than anything. That’s why business have to be so careful to cultivate goodwill in the free market. For major corporations like Nike and Coca Cola, the most valuable asset is their brand name.

A fast way to gain goodwill is by helping needy members of the community. Again reducing it to a simple market transaction, the businesses purchase the goodwill of potential customers through the intermediary of the needy person. Then, by patronizing that business, the customers can experience the euphoria from charity, knowing that they helped to support the business that helped the needy person—essentially purchasing the euphoria from the poor person through the intermediary of the business.

In other words, a market-based system of voluntary charity provides incentives even for “greedy corporations” to help the needy. It is in the corporations’ best interests to bolster their reputation by supporting worthy charitable causes in order to add value to their brand in the mind of consumers.

Allowing the economics of voluntary charity to proceed unhindered also works in favor of helping needy individuals and ending poverty. The overall effect of the free market is that needs are satisfied in the most efficient manner possible. Keeping in mind that the charity market is essentially a market for the euphoria that comes from helping people, those who are most likely to receive donations are the ones who make the donors feel like they have made a difference—the ones who can show results.

Thus, the most efficient and effective use of charity money is on people who have a plan, utilize the donations well, and explain the success to the donors. Contrasted with a beggar seen regularly on the street, in the same condition no matter how much money they are given, the more satisfying choice is obvious. In this way, the euphoria of the donors is maximized, and the likelihood that they will donate again generally—and to the efficient receiver, specifically—is also maximized.

For the same reason, fraud is minimized in the voluntary market for charity. If the market is truly for purchasing the euphoria of helping someone, then finding out that you have been cheated will sap the will to give. Ergo, charity organizations may find ways to vet people who claim to be in distress and apply for aid. It seems logical that a person burned at one charity organization is also unlikely to give to another, and so charities would share information about abusers of their services with each other.

Since the existence of a charitable organization is dependent on continued donations, they will do everything they can to prevent fraud. When an organization can just take your money via force—like the state—it doesn’t have to be as careful.

For example, the US government recently passed bills creating more than $6 trillion in welfare to help the economy recover after the COVID lockdown measures they imposed. But not only did most of that go to politically connected special interests, the government also lost more than $200 billion to fraud.

When government steps in to regulate or replace charity with its welfare programs, the market function is distorted, as it always is when the government interferes. Without the direct and voluntary connection between giver and receiver, the euphoria of giving is nonexistent. The money taken for welfare programs then is nothing but a solid loss to those it was taken from.

And those who receive now do so through a faceless government bureaucracy with little, if any, accountability. Rather than being inspired to utilize the donations with maximum efficiency, the more they squander the money the more they will receive, since the government’s numbers will show them in even worse poverty.

Indeed, the government welfare system has an interest in keeping it that way, since the jobs of those who administer it depend on people being in poverty. As Isabel Paterson pointedly stated in The God of The Machine, “If the primary objective of the philanthropist, his justification for living, is to help others, his ultimate good requires that others shall be in want. His happiness is the obverse of their misery.”

“If the primary objective of the philanthropist, his justification for living, is to help others, his ultimate good requires that others shall be in want. His happiness is the obverse of their misery."

Government welfare creates a dependent class, both of welfare receivers and of administrators, all of whom live on money forcibly taken from others. In the economic sense, this is nothing but institutionalized theft. Voluntary charity, like any market action, is a voluntary exchange of goods.

And like any exchange in a free market, both parties benefit from the transaction—and the tendency is to encourage the most efficient producers of the good. Rather than creating a dependent class of moochers, voluntary charity tends to reduce the number of people in need by rewarding those who escape poverty and need, and discouraging fraud.

We believe that voluntary interactions are the only way to truly help others. It’s a fact of humanity that people will freely act out of their own self-interest—and as outlined above, that self-interest often includes meeting the needs of others. When government steps in, nobody ends up benefiting except the government agents—and in the long run, not even them. As Friedman said, both parties benefit when exchanges are made voluntarily on the free market.

At VIA, we strive for a world of voluntary interactions that benefit everyone involved. The economics of voluntary charity and free markets demonstrate that this is possible.

Share on facebook
Facebook
Share on twitter
Twitter
Share on linkedin
LinkedIn
Share on pinterest
Pinterest
Share on email
Email
Share on print
Print
post

The Rich Do Not Rule: The Voluntary Economy

“The capitalistic market economy is a democracy in which every penny constitutes a vote.”

– Ludwig von Mises

An assertion that I’ve heard often from opponents of a voluntary (i.e. free market) economy is that it will cater only to the rich. Their argument is that when every dollar (Mises said “penny,” but we’re accounting for inflation) is a vote on what should be produced, the people with more dollars will have a disproportionate amount of power. “Poor and middle class people will be economically marginalized!” they wail. “We’ll all be slaves to the giant corporations!” they insist, ignoring the government’s legal monopoly on violence, and all it implies.

However, a quick exercise of reason is enough to dispel these emotive arguments.  Let’s imagine a typical billionaire—we’ll call him Beff Jezos. Although this isn’t at all how wealth works, let’s assume that Mr. Jezos has $100 billion sitting in his bank account. Mr. Jezos could buy a lot of things with that $100 billion, or a few very big things. But does his ability to buy outweigh the rest of the population? There are approximately 330 million Americans. If only a third of them spent an average of $1K each, that would be $110 billion. They could outbid Mr. Jezos—even if he tried to spend his entire $100 billion. The spending power of the rich cannot compete with the spending power of the poor and middle-class masses. To further demonstrate, let’s try a logical exercise you can sink your teeth into.

the rich do not rule
An ultra high-quality steak.

Let’s say that billionaires want to eat ultra high-quality steaks. According to the argument from opponents of voluntary markets, the entire agricultural industry, desperate for the money of the billionaires, will reorganize itself to produce stupendous steaks. This will leave everyone who is not a billionaire with little or nothing to eat.  Suppose there are 100 billionaires who are willing to purchase steaks at $500 each. If they each eat a steak at every meal(!), they’re spending $150k per day.

While that’s surely a prize worth competing for, there are still >300 million people who need to eat. If they each spend $0.50 per meal, that’s >$450 million per day.

Put another way, 100 billionaires would each have to spend $1.5 million per meal to have the purchasing power of everyone else spending fifty cents each. While the needs of the few rich will quickly be met, all the other producers of steaks (and other things) won’t sit on their hands, waiting for the rich to want something else—meeting the demands of the masses can pay much better. And the masses have a lot of demands.

The capitalistic market economy is a democracy in which every penny constitutes a vote.

This already happens to a certain extent. The Waltons did not become rich by making Walmart a store for the wealthy. Amazon does not cater exclusively to billionaires, or even millionaires. The people who benefit most from Walmart’s inexpensive goods and Amazon’s fast deliveries are the poor and middle class. This has always been the case. And if today’s huge businesses can’t keep up with the demands of the masses, they can be dethroned quickly when outperformed by a competitor—remember when Kmart and Ebay were the big players?

Of course, competition can be squashed, but this can only happen to the detriment of customers when it’s done through coercive government action. Dr. Tom Woods has shown that the classic caricature of the monopolist—a fatcat mercilessly raising prices to gain profits—only happens when the government forces competitors out of the market. In a voluntary free-market economy, government economic interference (never voluntary) would not exist. There could be no billionaires who become rich through political graft—trade restrictions, buying off politicians, government bailouts, subsidies, tariffs, corporate lobbying, competition-killing regulations, etc. Then the only way for anyone to become rich would be to persuade people to voluntarily purchase the product or service they provide.

Milton Friedman stated that “the most important single central fact about a free market is that no exchange takes place unless both parties benefit.” If the billionaire does not offer a good product or service to a wide range of customers, few people give them money—and in short order, they’re no longer a billionaire. In a voluntary economy, the rich do not rule, but the average Joe and Jane. It’s as close to the stated ideals of democracy that we can get—and unlike political democracy, nobody gets shot if they don’t comply with the majority.

Share on facebook
Facebook
Share on twitter
Twitter
Share on linkedin
LinkedIn
Share on email
Email
Share on print
Print
post

Is Capitalism Voluntary?

Depending on your views, capitalism is one of the most hated or loved economic systems in the world. When you ask “is capitalism voluntary?” the answer depends on what the person thinks “capitalism” means. The primary factor to consider is the level of state intervention—or force—that is being considered.

What most detractors of capitalism are typically against is the union of big business with the government. That union is actually better defined as state capitalism or corporatism—a form of syndicalism that was the basis for the economic policies of Nazi Germany and Fascist Italy. This brand of “capitalism” is a system where the government grants special privileges to certain corporations, unions or other groups.

These privileges could be anything from outright monopoly, to tariffs and subsidies, to burdensome policies and regulations that drive small businesses out. But all these tactics have one thing in common: through the force of the government, people are being prevented from voluntarily choosing their economic actions. Essentially, the government picks which companies are winners and losers—and the citizens are stuck with what the government decides.

In free-market capitalism, it is customers, rather than the government, who picks winners and losers—and the winners are the ones who provide people the product or service they want.

I’ve found that most people who support capitalism are typically thinking about free-market capitalism, also called “laissez-faire” economics. Championed by classical liberal economists like Ludwig von Mises, F. A. Hayek, and Milton Friedman, this emphasizes the right of people to freely and voluntarily exchange goods and services. Under this free-market capitalism, the government is not involved in the economy at all, except to protect private property.


In free-market capitalism, it is customers, rather than the government, who picks winners and losers—and the winners are the ones who provide people the product or service they want. Often what people want is the product that’s the best quality for the lowest price, but not always. People who want to protect the environment can buy environmentally-friendly products. People who care most about supporting small and local businesses can do so. People who only want to buy “Made in America” products are as free as people who only want foreign goods.

What most detractors of capitalism are typically against is the union of big business with the government.

Most importantly from the producer’s viewpoint, people who can find a better way to produce a product or provide a service are free to try, without the weight of government regulations throttling them down. Most importantly from the consumer’s viewpoint, producers must compete for their purchases, resulting in higher quality and lower price.

It’s clear that state capitalism (fascistic corporatism) is not voluntary, since government intervention in the economy is involved by definition. But some people (particularly communists and socialists) declare that even free-market capitalism isn’t truly free or voluntary. They say it involves coercion, because if a person doesn’t work they starve—therefore people only consent to employment under the implicit threat of starvation.

To the extent that this has any merit, the criticism is actually still of state intervention into the market, for without regulations barring their way a dissatisfied employee could start their own business, or at the extreme even homestead a piece of property and start a farm—or choose a subsistence lifestyle.

You can imagine how long a modern communist would last on a deserted island, wailing that he's oppressed because he has to find food to stay alive.

However, I strongly suspect that what is being objected to by the communists and socialists is the plain fact that people must work (in a general sense) to live. They view this as oppression and ascribe it to capitalism, but it’s a fact of reality that the stuff to sustain life does not come automatically—this is not a unique trial of humanity. You can imagine how long a modern communist would last on a deserted island, wailing that he’s oppressed because he has to find food to stay alive. At the same time, the communists and socialists are ignorant that the bounty around them in developed countries is largely the result of human freedom—and therefore, they have a profound ingratitude for both the bounty and its source.


So, the answer to the question “is capitalism voluntary?” largely depends on what you’re talking about when you say “capitalism.” If you mean the fascistic corporatism of most modern states, then the answer is no—and giving more power to the state will only make it worse. But if you’re referring to the ideal of a free-market capitalism, then the answer is yes—and giving more freedom to individuals to make voluntary economic actions will only make it better.

Share on facebook
Facebook
Share on twitter
Twitter
Share on linkedin
LinkedIn
Share on email
Email
Share on print
Print
post

Why is Housing So Expensive?

Something that VIA frequently gets requests for is help with rent payments. Why is it difficult for so many people to afford housing? Why is housing so expensive? The standard answer is that it’s those lazy landlords, sitting on piles of money and smoking cigars, who are to blame. This seems to make sense at first glance—after all, aren’t the landlords the ones who are charging the rent? But lets take a closer look by examining a case from a simpler time: that of Pa Ingalls in Little House on the Prairie.

Pa Ingalls, though frequently short on luck, was an entrepreneur at heart. Anticipating that a thriving town would one day stand on the rolling grasslands, he picked a deserted spot nearby and started building a farm. This is called homesteading—in the words of John Locke, Pa Ingalls had “mixed his labor” with the land, and in doing so made it his property. He had built a nice little farm when disaster struck—worse than a prairie fire or drought. The United States government decided that it owned the land that Pa Ingalls had built on, and he had to leave to make room for indigenous Americans (who were, incidentally, forced to moved from other land that the government had also decided it owned—but that’s another story).

Fast forward a hundred and fifty years, and we see that the cause of the Ingall’s housing crisis is the same as our own: the government. At the simplest level, a person who needed a house could simply go to an unowned spot of land and build a shelter—not an ideal long-term solution, but everyone has to start somewhere. This simple expedient is forbidden, however, because the government has decreed that it owns all the land in America. Why, when it has not done anything at all to the land to make it the property of the government? Because, that’s why—and if you build a house on it, you’ll only be kicked off and have your house stolen—if you’re lucky.

In a free market, the high price of housing would cause people to want to build more housing—because they want the profits.

Fortunately, in a complex economy, there are people who are much better at building a house or apartment than the average person. In a free market, the high price of housing would cause people to want to build more housing—because they want the profits. But with more housing available, the price would decrease, since renters would have more options. So what stops that from happening? Again, the government. In addition to directly increasing the cost of housing—such as through property tax—the government indirectly increases the cost. Zoning laws, building codes, and other rules and regulations prevent new housing from being created when it is needed. Not coincidentally, this makes some people demand that the government Do Something, which usually leads to more government control over people’s lives.

That’s where voluntaryism comes in. Right now, all we who are more fortunate can do is help people pay the high costs that government has imposed on everyone. But in a truly free society—one without Big Brother telling everyone what to do—how would housing be provided for the less fortunate? The possibilities are nearly endless. Simple charities—to build new housing or pay bills—would be one way. Subsidized or even no-cost housing could be made available by businesses—people are much more likely to shop at a store they live right next to than one across town. Microliving in low-cost rental living pods, house-sharing agreements, and other creative voluntary arrangements would flourish. The answer to “why is housing so expensive?” can be summed up in one word: government. But in a voluntaryist society, the solutions to the housing problem are limited only by human imagination and initiative.

This article was originally published by Being Libertarian.

Share on facebook
Facebook
Share on twitter
Twitter
Share on linkedin
LinkedIn
Share on email
Email
Share on print
Print