The minimum wage

> The Austrian theory of price determination is based on double inequality of valuations<

That is fine for single instances of a transaction, but the normal business model calls for repedity of transaction.  The same product will be sold again and again, and so the price determination is a bit of a dance.  Obviously the price is normally in excess of obtainment cost, but by how much can vary week to week within the same business, let alone between businesses.  Whether the nominal markup will cover the fixed costs of the business is wholly dependent on volume.  Often the normal markup will be abandoned for a time in order to increase the volume of sales.

Almost always, the price is negotiable within limits, because the sellers posted price is not the limit of his valuation.  The valuation has not met in a single point but is open in a range that is agreeable to buyer and seller, while each may attempt to reach a more favorable deal by finding a price closer to the limit than what is originally stated.

 I would have to argue that for millenia, there were no minimum wage restrictions placed on the price of labor and yet, the price of labor fluctuated according to supply and demand freely.  This is evident through the numerous examples provided by Adam Smith in his "Wealth of Nations," among countless others.  I think to state that there is no "historical merit" for positive free market movement of wages is to avoid a great deal of historical economic record.

However, you are right that if the minimum wage restrictions were removed, the price of labor would drop significantly as they have been artificially crutched for so long which would, in turn, slow economic expansion.  When you have artificially inflated prices, the fall that ensues is always harder than it would have been if the artificial inflation hadn't occurred to begin with.  I wish we could find a way to make the economy expand without interruption, but I know that doesn't work.  The greed, pride, seflishness, and ignorance of humankind must be paid for by the masses through contraction phases of the economic cycle.  We make mistakes, and the contraction phase naturally erases the aggregate of those mistakes equally socially.  Believe it or not, the market does Marx's job better than he can.  While some might be individually injured beyond the contraction cycle, in an ideal setting, the ensuing expansion would provide society the ability to forgive the individual's debts.  This is why Jewish society required forgiveness of all debts every seven years.  That would definitely make creditors be a lot more careful to whom and for what they lent.

Regarding the Depression period specifically cited as an example of historical precedence, I think it is important to remember the federal administration's vested interest in getting the economy rolling again, which caused them to fight anything that slowed things down.  After a decade of over-inflated growth, there was great need for a major slowdown, and removing minimum wages would have brought prices down for all commodities, including labor...  instead of letting the market slowly and surely work out the kinks from a decade of stupidity and irresponsibility, the administration needed a solution virtually immediately, which led to the social programs, minimum wage standards, and ultimately, to war.  The wages fell and the economy slowed down when the minimum wage standards were removed because that is where the economy needed to be to repair itself from the damage caused.

 It actually sounds like the Wall Street, the Fed, and the government right now.  They are fighting what is essential for the economy:  A serious slowdown of the economy.  When banks are making the greed-blinded foolish decisions they have and consumers are borrowing well beyond their means and being lazy and the Fed is perpetuating the problem in their best interest, we are in grave need of a huge kick in the pants to get our feet back on the ground.  We've gone to long without feeling the pain of foolishness, and the longer we numb it, the more it'll hurt when we have no more novocaine to pump.

 The foundational problem of free market movement is that people are selfish and greedy, what you are probably referring to when you say "normal market forces"... Darwinistic free market is very bad for everyone involved.  But selflessly motivated free market, even in isolated groups, works very well.  

Also, if you read specifically regarding the price of goods produced, minimum wage standards wage the price of goods sold proportionately to the increase in money supplied.  All that it really manages to accomplish is to enforce a shift of wealth from the middle class, and to a lesser extent from the upper class, to the lower class.  More buying power to the poor has obvious negative ramifications while minimizing buying power in the most productive classes seems counterintuitive.  Minimum wage standards are social redistribution tools, not economic tools, in the same way that all taxes (only in a fiat monetary system), food stamps, and welfare are social redistribution tools, but that's a whole 'nother can of worms.

 Well Allan, welcome to the Mises forum.  There are people here that are willing to discuss these things with you.  You went with your word and decided to come here.  I will stay here and discuss these things further.

> there were no minimum wage restrictions placed on the price of labor and yet, the price of labor fluctuated according to supply and demand freely.<

Wages tended to rise with war and colonization.  Otherwise it remained at subsistance.  And please notice that war and colonization is government activity and cannot be considered free market at work.

>to state that there is no "historical merit" for positive free market movement of wages is to avoid a great deal of historical economic record.<

No.  I only avoid a great deal of economic nonsence on the subject.

>However, you are right that if the minimum wage restrictions were removed, the price of labor would drop significantly as they have been artificially crutched for so long which would, in turn, slow economic expansion.<

 Many of the regulations removed in 1924 had been in place for less than a decade.  The regulations removed in 35 had been in place for only 2 years.  In both cases the repercussions on the economy was extreme.

>But selflessly motivated free market, even in isolated groups, works very well.<

That is your heartfelt belief.  It is not mine. 

>While some might be individually injured beyond the contraction cycle, in an ideal setting, the ensuing expansion would provide society the ability to forgive the individual's debts.<

There is no ensuing expansion.  The economy is not short of businesses.  The economy is short of consumer dollars.  Allowing wages to drop as they did in the late 20s does not lead to the roaring 30s.

>I think it is important to remember the federal administration's vested interest in getting the economy rolling again, which caused them to fight anything that slowed things down.<

Cash supply is a product of the economy; not a controller of the economy.  Keynes sugestion that the economy could be enhanced or tempered by the central bank's provision is wholly without merrit.  Your ascribing the 20s and 30s to the power of the reserve is an ascention to the megalomaniac propaganda that Keynes and the Fed have subjected you to.

>They are fighting what is essential for the economy:< 

 And they don't have a clue.  The big problem right now is that all economists ascribe to Keynes' notion that lowering interest rates can increase the cash supply.  The cash supply is not from the largess of the government.  The cash supply is an extension of bank credit.  When interest rates are slashed, the banks earnings are slashed and so its cash production tends to shrink.  They have the gas peddle and the brake peddle confused.  This is the cause of all hyperinflation that has mysteriously appeared here and there since Keynes first spewed his nonsense.

 >All that it really manages to accomplish is to enforce a shift of wealth from the middle class, and to a lesser extent from the upper class, to the lower class. <

No.  The wealthy are not the main consumers of labor.  Labor employs itself, because the laborer is the consumer.  The minmum wage does not constrict the economy at all, but disallows excessive exploitation which is extremely constricting on the econmy 

>the most productive classes<

The economy rests on the production and consumption of the guy on the floor.  People in their ivory towers are not the producers, but the controllers of the producers, the guy on the line.

 Controllers are also producers, we're all producers and consumers.  Class warfare is not neaded for exchanges. Competition is to be strived for to increase the welfare of the aggregate. You can plan for competition, but fail when you try to plan against it. The failure results in means, and from the premise of perfect knowlage, which is not possible by man.

The wage employed when coerced by force becomes involuntary, and not a proper exchange. So for law to interupt the natural market competition, leads to subjugation, and not freedom to employ the best means.

Protectionism sucks! It serves the few by force. It not only fails to protect those it aims too it hurts everyone as a whole.

Yes, goods and services just magically distribute and sell themselves...

"Wages tended to rise with war and colonization.  Otherwise it remained at subsistance.  And please notice that war and colonization is government activity and cannot be considered free market at work."

 My question is then this Allan: can wages ever rise under free market standards?  Without government intervention into the economy, can wages rise naturally?

 "No.  I only avoid a great deal of economic nonsence on the subject"

Someone on this forum here posted a website that showed 50 years of economic research on the effects of minimum wage on the economy.  9/10 times, it was against minimum wage.  Can you explain why these particular studies are false?  What did they do wrong in the research excatly?

 "Many of the regulations removed in 1924 had been in place for less than a decade.  The regulations removed in 35 had been in place for only 2 years.  In both cases the repercussions on the economy was extreme."

What regulations excatly(besides minimum wage of course)?  Also, what negative effects(I am assuming negative) happened when they removed regulations in 1924?  Please show evidence of the negative effects you speak of.  From what I have seen, between 1924-1929, GDP growth was constantly increasing.  So what basis do you say between 1924-1929, that the economy was doing bad?

"And they don't have a clue.  The big problem right now is that all economists ascribe to Keynes' notion that lowering interest rates can increase the cash supply.  The cash supply is not from the largess of the government.  The cash supply is an extension of bank credit.  When interest rates are slashed, the banks earnings are slashed and so its cash production tends to shrink.  They have the gas peddle and the brake peddle confused.  This is the cause of all hyperinflation that has mysteriously appeared here and there since Keynes first spewed his nonsense."

From my understanding of what Keynes meant, was strictly looking from the consumer side.  The consumer seeing lower interest rates...will have more of an incentive to take out a loan.  I mean, I would take out a loan at 5% interest...than at 10%.  Yes, banks will make less money...but you can easily make as much money by giving out many loans at a low price....than if they make few loans at a high price.  The amount of revenue can be the same.  I believe someone here pointed out that the cash supply is the same if 100 people taking out $10 loans vs 1 person taking out a $1000 loan.  According to Austrian Theory(someone correct me if I am wrong on this), was that the boom of the 1920's was precisely caused by the low interest rates of the feds.

But my question for you on this particular issue is this:  Since cash production tends to decrease, I am going to assume that the cash supply shortens...causing deflation.  Can you show points in time where lowering interest rates caused deflation?  As of now, the only one I can think of is Japan.  Is there any others?  And I could be mistaken about Japan as well.

Xevec:

But my question for you on this particular issue is this:  Since cash production tends to decrease, I am going to assume that the cash supply shortens...causing deflation.  Can you show points in time where lowering interest rates caused deflation?  As of now, the only one I can think of is Japan.  Is there any others?  And I could be mistaken about Japan as well.

After the stock market crash of 1929, the Fed attempted to inject huge amounts of credit into the economy, through lower interest rates; however, since many banks were closing, and the remaining ones were unwilling to take the stuff, deflation continued to occur (as it normally would during a contraction). I would say, though, that deflation occurred in spite of, and not because of, lower interest rates.

 >Class warfare is not neaded for exchanges.<

Minimum wage increases are not class warfare.  Class warfare occurs when the poor really have no choices.  Giving the poor a slightly better wage grows a strong economy from the ground up. 

>Protectionism sucks! It serves the few by force. It not only fails to protect those it aims too it hurts everyone as a whole.<

That is your belief.  It used to be my own.  I have gotten over it.  It runs completely counter to my current understanding, which is not something I got from a book or a teacher. 

>Without government intervention into the economy, can wages rise naturally?<

 Wages rise naturally after the floor is above subsistence.  Disposable income is the key that allows labor to get specialized.  As long as the vast majority of consumers have zero disposable income, there can be no healthy market.  Wages cannot rise above subsistence without government intervention.

>Can you explain why these particular studies are false?<

It is about verification bias.  Think about our own interaction, and how much work I've put into informing you of my understanding.  You have very often exhibited a flat refusal to allow that what you've learned might be in error.  When I point to facts that conflict with your understanding, you have repeatedly indicated that the clear correlations are invalid for some reason that cannot be fully understood in the real world.  You have severe emotional attachment to what you have studied.  Your emotional attachment to your world view will be exponentially expanded as you tutor and/or advise and/or publish according to what you've been taught.   When I cannot convince you now to take an objective look at what you've been taught, how do you think established and tenured professors are going to be objective when they conduct a certain study. If the study result does not conform to acceptable views within the discipline, the study is soundly vilified by the majority of colleagues.

>From what I have seen, between 1924-1929, GDP growth was constantly increasing.<

And 1929 showed that the perceived growth was ethereal.  As I have told you, growth is a product of expectation and not of realized expectation.  It was when it became clear that the economic growth was devoid of expected consumer dollar growth that the entire system of expectations fell apart.

>Yes, banks will make less money...but you can easily make as much money by giving out many loans at a low price....than if they make few loans at a high price.<

The bank's lending limit is dependent on its profit.  It cannot lend out more money on a constricted profit.

>And I could be mistaken about Japan as well.<

No you aren't.   You can take a look at the papers today as well.  The fed has lowered rates again, and what happens?  Immediately, cash shrinkage shows in the stock market, and people are refused when they attempt to renew their mortgages.  Money gets tighter as the interest rates drop.  This should be obvious, but economists are quite proficient at ignoring the obvious.

" Wages rise naturally after the floor is above subsistence.  Disposable income is the key that allows labor to get specialized.  As long as the vast majority of consumers have zero disposable income, there can be no healthy market.  Wages cannot rise above subsistence without government intervention."

Ok, so from my understanding, you would agree that without government intervention...wages can not rise.  That we as an entire nation would be making "subsistence wages."  Does this include all individuals?  From the lowly cashier...to the accountant and the doctor?

 

"And 1929 showed that the perceived growth was ethereal.  As I have told you, growth is a product of expectation and not of realized expectation.  It was when it became clear that the economic growth was devoid of expected consumer dollar growth that the entire system of expectations fell apart."

My question is...why all of a sudden in 1929...did people stop having these expectations of good growth?  What made them change their mind?  Why did the ENTIRE MARKET start believing that there is no more room to grow?  I mean, I highly doubt everyone had that same thought.  What, there wasn't a significant portion of people who believe that the market couldn't go anywhere but up?

"No you aren't.   You can take a look at the papers today as well.  The fed has lowered rates again, and what happens?  Immediately, cash shrinkage shows in the stock market, and people are refused when they attempt to renew their mortgages.  Money gets tighter as the interest rates drop.  This should be obvious, but economists are quite proficient at ignoring the obvious.

 

Actually, not really.  From looking at the stock market...the Dow Jones is doing quite well..as well as wall street itself.  Yes, the dollar has lowered purchasing power...but that means foriegners wanting to buy our goods will increase...since they can now buy more of our products with less money.  People are refusing to renew their mortgages not primarily because of the money supply.  But I can't comment on the housing bubble that much.  I will leave that to the other posters on the mises forum.

 

">Yes, banks will make less money...but you can easily make as much money by giving out many loans at a low price....than if they make few loans at a high price.<

The bank's lending limit is dependent on its profit.  It cannot lend out more money on a constricted profit.  "

 

Actually, a bank's lending limit is dependent on how much debt can exist in the nation.  It can easily lend out more money on a constricted profit.  It simply creates it out of thin air.  They have done it for years.  They can easily create more money by inputting numbers in the computer.  Simple as that.

 

"It is about verification bias.  Think about our own interaction, and how much work I've put into informing you of my understanding.  You have very often exhibited a flat refusal to allow that what you've learned might be in error.  When I point to facts that conflict with your understanding, you have repeatedly indicated that the clear correlations are invalid for some reason that cannot be fully understood in the real world.  You have severe emotional attachment to what you have studied.  Your emotional attachment to your world view will be exponentially expanded as you tutor and/or advise and/or publish according to what you've been taught.   When I cannot convince you now to take an objective look at what you've been taught, how do you think established and tenured professors are going to be objective when they conduct a certain study. If the study result does not conform to acceptable views within the discipline, the study is soundly vilified by the majority of colleagues."

 

Allan, I am not talking about me.  Also, what "facts" have you pointed out?  For the sake of the other people in this forum...please show the evidence that runs contrary to the evidence presented from the 50 years of minimum wage research.  You say my verification of these things are from an emotional standpoint.  just because you have an emotional attachment to something, doesn't make it wrong...does it?  I mean, I don't think there is anything wrong with an emotional attachment to an ideal.  I mean, some people have an emotional attachment to the idea of helping others as much as possible.  Or stopping people from committing "excessive exploitation."  But does it make it wrong?

 

Hmm, aren't all studies like that?  Yes, the particular study from card and kreuger(which was opposite of most of the studies) did recieve critiques.  The problem is, that study hasn't been able to be replicated.   Secondly, are you comparing me looking at a study to someone who has been doing economics for years?  I can certainly say my knowledge of economics certainly can't compare to someone like Robert Murphy...or George Reisman.  I believe both of these men have retired from teaching...but so what if they are "tenured?"  That because of this, they won't have an "objective look?"  What would you consider to be an objective look?  That minimum wage isn't harmful?  Is that objective?  That is just as biased of a statement as saying "minimum wage is harmful."  You don't think that people who have critiquied the study of card and kreuger gave legitimate reasons?  What particular reasons of the card and kreuger study did you find to be "unfair?"

 

According to Ludwig Von Mises(and most of austrian economics), economic laws can not be tested in the real world.  This is because of the complexity of human beings.  We can not read their thoughts...or judge their values accurately.  We can not place the world in a laboratory setting.  So we can't easily see cause/effect relationships relating to economic laws.

 

Secondly, I can sum up your objections by saying I have an emotional attachment...and that they were reviewed by economists(even though the website doesn't specifically say the studies were done by economists).  I mean, it is very possible these studies were done by socialogists.  Or anthropologists.  Or any other field of study besides economics.  Secondly, as I believe most of the mises readers would agree...minimum wage among economists isn't set in stone.  Not all economists believe minimum wage should be abolished.  At most, it would be 50%.  source of this information. Yes Allan, I do believe that all things should be questioned.  But it isn't always true that things that are held by a majority of people believed to be true is automatically wrong.  But I ask you again....what from the results of the research was done wrong?  Secondly, what criteria is necessary to have an "objective look" when conducting a study?  And is it possible to come to the conclusion that minimum wage is harmful even when having this objective look?

http://gregmankiw.blogspot.com/2006/11/consensus-of-economists.html

 FTA: One issue that fails to generate consensus is the minimum wage: 37.7 percent want it increased, while 46.8 percent want it eliminated.

I would assume the rest don't want it to change at all. 

If you wish to see the research paper, go here: http://www.bepress.com/ev/vol3/iss9/art1/ 

 

Please readers, correct me in any statements that seem to be inconsistent.   

Oh boy... let's leave methodological arguments out of this. Suffice it to say that economic laws do derive from the real world, except not in the Kantian way that Mises believed in. They are grounded in action, and are conceptual truths. The reason they are aprioristic is because facts by themselves say nothing, and if taken as they are reveal nothing of interest. They need interpretation. The reasons you offered Xevec are auxiliary, not primary.

 Arman, either provide counter-evidence or admit that you're wrong. Your response to Xevec was a classical example of an evasion, and could just as easily be applied to you.

Arman:

 Wages rise naturally after the floor is above subsistence.  Disposable income is the key that allows labor to get specialized.  As long as the vast majority of consumers have zero disposable income, there can be no healthy market.  Wages cannot rise above subsistence without government intervention.

You are wrong on all these accounts.  Specialization (or "division of labor") is the result of trade.  Somtimes, it's abject poverty and starvation (i.e. complete lack disposable income) that force governments to abandon statist controls and allow the re-emergence of trade and specialization; that happened both shortly after the Mayflower landed and in more recent times in the former communist bloc countries.  Previously, both societies experimented with government mandated equality in distribution of wealth;  both failed miserably.  The sum total of disposable income does not change whether that money is paid to the workers or kept in the pockets of the factory owners, so your "disposable income" theory holds no water.  Besides, what the heck is disposable income anyway . . . if you remove minimum wage, and a new group of baby sitters enter the market place charging $5/hr instead of the previous minimum wage of $7/hr, suddenly you have the middle class parents gaining disposable income of $2/hr (hiring hours) and $5/hr (working hours) for the new baby sittters . . . both the $2 and $5 are disposable income because they were previously making do without them.

Now onto the more important point that you made, that wages cannot rise above subsistence without governent intervention.  That's just plain wrong.  The overwhelming majority of workers in this country make far more than minimum wage.  I'm paying people working for me at double to 8x minimum wage requirement.  I can't ever recall being forced by the government to pay that much.    

Arman:

And 1929 showed that the perceived growth was ethereal.  As I have told you, growth is a product of expectation and not of realized expectation.  It was when it became clear that the economic growth was devoid of expected consumer dollar growth that the entire system of expectations fell apart.

What 1929 showed was the fruitlessness of monetary expansion in the 1920's.    What followed in the 30's did not have to be a depression, but became one when the double-barrelled margin compression from trade restrictions (hece less export revenue and less economic efficiency) and wage demands by the unions (backed by a government that refused to enforce property rights) reduced companies to bankruptcy.

Arman:

The fed has lowered rates again, and what happens?  Immediately, cash shrinkage shows in the stock market, and people are refused when they attempt to renew their mortgages.  Money gets tighter as the interest rates drop. 

You are messing up some really basic financial terms.  The FED does not directly control the interest rate at which banks lend to their clients.  What the FED does control is the rate at which banks can borrow from the FED.  Since the most basic operation of banks is borrowing short and lending long, the   FED's action in lowering short-term interest rate immediately increase the potential profitabilty of banks.  That's actually how Citibank was saved by Greenspan in the early 1990's.

>From the lowly cashier...to the accountant and the doctor?<

When the government of Rome fell apart, so too did the economy.  For the next 800 years, almost all skilled professions requiring some education were controlled and staffed by the clergy, requiring vows of poverty.   Only the stonemason maintained some autonomy, but found work only in the church's cathedrals.

> I mean, I highly doubt everyone had that same thought.<

The evidence of a shrinking consumer dollar was there from 24 to 29, but sound expectation turned to desperate hope over those years. When reality set in, the entire system was primed to crumble.

> People are refusing to renew their mortgages not primarily because of the money supply.  But I can't comment on the housing bubble that much.<

Why do you start to comment, just to say 'no' to me, and then confirm that you really don't feel comfortable enough in the subject to comment?  If you don't understand what you are talking about, why do you talk?

>People are refusing to renew their mortgages..

??  People are not refusing to renew; the banks are refusing to renew.  I saw one documentar