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Maximum Folly

Thursday, February 6, 2014 17:28

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(Before It's News)

TND Guest Contributor: Charles Horton |

Some years ago I came across an outstanding book on economics written by Thomas Sowell, “Basic Economics”. The book is full of easy to understand examples of economics in action, but perhaps the best part of the book for me was the beginning where he defined the study of economics as the study of scarce resources with alternate uses.

That simple definition changed the way I look at the world. Suddenly I became aware of how free markets allocate resources without coercion, and how governments distort market allocations of resources for the welfare of cronies associated with said governments.

You may ask just how do markets allocate resources fairly? Well they don’t purposely allocate anything, but through supply and demand it is done as a normal consequence of market activities. As a resource becomes scarcer, the price rises which limits the use or consumption of that resource to those who can afford it. Similarly as production is improved and scarcity is decreased, prices fall allowing for more consumption by more people.

But, this is way too simplistic many tell me. While I would agree that my description of the free market in action is not the present reality, it is exactly what would happen in a real free market. What we currently experience is only called a free market in a vain attempt to legitimize government actions in the name of freedom. In the current government run marketplace, resources are allocated by regulation and the simple law of supply and demand is ignored. But, these measures only distort the market.

As an example of this I call your attention to the recent move to raise the minimum wage to $10.10/hour. No matter how much we wish that everybody will be gainfully employed at jobs that pay wages adequate for those employed to live without assistance, supply and demand should set the wages for every job. Here is what happens when this simple law of supply and demand is ignored. First of all not every worker is equal in skills, ability to learn, and experience, and not every job produces the same amount of wealth from which the worker gets paid. Yet we allow government to set a lower limit for any job in which a worker is paid on an hourly basis.

What happens to the worker employed in a job that only produces wealth equal to $8/hour? Well, that job will disappear, kicking more workers into the marketplace. The additional supply should lower wages by the law of supply and demand, which normally would make more work available for those jobs that only produce wealth at lower wage levels, but since the market has been distorted those jobs are no longer available to accommodate the unemployed.

The new minimum wage also creates additional demand for those workers who have the most experience, best set of usable skills, and best ability to learn about the new job. Those who are hurt the most from this are young people, who have no experience, untried skill sets, and abilities to learn that are based upon years in public education, which bears little or no resemblance to real life.

If minimum wages really helped poor people, why don’t they make the minimum wage $50/hour, or $100/hour…or $1,000/hour?

The reality is a worker is only worth what he produces, less any profit his employer needs for return on his investment in the enterprise that supplies the job. Distorting reality doesn’t change it. It only fools those without thinking skills into believing that such measures can possibly work. History shows us that they don’t, and in fact such thinking contributed to both the severity and duration of The Great Depression.

In the years leading up to 1929, new “progressive thinking” began to circulate the idea that the American prosperity was due to the high wages being paid to American workers. When the market crashed in 1929, President Hoover got together with the leaders of industry and coerced them into “voluntarily” keeping their wages high, in other words the old high wage mark became the minimum wage. The products they produced were sold at prices that would pay these wages if and only if close to 100% of what they produced was sold at these prices. As many of their fellow countrymen were now out of work (Unemployment had skyrocketed to 8%), unsold inventories began to accumulate. Industry’s only choice was to reduce the number of employees and that is what they did. Suddenly the unemployment rate was 10% and then 13%. In 1932 America elected a new president, but the policies remained in place.

Also, European goods were not bound by this same pledge to keep wages high. As such they now had distinct competition advantages over American made products. This destroyed even more jobs and led to a protective tariff (Smoot-Hawley), which only served to destroy jobs in Europe as well as America when Europe retaliated.

Yes, those who ignore history are doomed to repeat the failures of the past, and the proposed minimum wage laws are just a variation of the failed policies that students of history learn were partially responsible for the Great Depression.

Minimum wage laws do serve some people. Make no mistake about that. My guess is that those in Government are well served by such laws, which bring in greater tax revenues enabling those same politicians the use of funds to purchase more power. Also bureaucrats, who produce nothing of value, are gainfully employed enforcing the dictates of the Imperial State. Everybody else loses.

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Charles (Chuck) Horton is a semi-retired entrepreneur, liberty activist and co-host of Double Crossed Radio on UCY.TV airing every Thursday evening 7 p.m. to 9 p.m. PST – 10 p.m. to 12 a.m. EST. He owned and operated a retail jewelry business for 21 years in Medford, Oregon, where he learned economics the hard way. He can be contacted through his Facebook page by clicking here.